Using a credit card to consolidate your credit card debt.
When credit card debt payments start to get out of control, most people would prefer to solve those problems on their own. Going to someone else to solve your debt problems can feel like failure; it’s not. However, this is still often the feeling people experience and communicate to our credit counselors when they finally call to get relief.
And while it’s true that in some cases a borrower can address their debt challenges on their own, you have to be careful to make sure you’re using a solution that will work and not just one that prevents you from having to go outside for help. The information below is designed to help you really understand how credit card balance transfers work so you can decide if it’s a good choice for you.
If not, don’t worry! There’s nothing wrong with needing a little help to overcome financial challenges. If you’re in too much debt or don’t have the credit score you’d need to use a balance transfer successfully, call us today at or complete an online application to request a free debt and budget analysis from a certified credit counselor.
How consolidating debt with a balance transfer works
Balance transfer credit cards have become its own unique category of credit because they can be useful for consolidating debt when you have a good credit score and a relatively low amount of debt to consolidate. Here’s how it works:
- First you apply for a balance transfer credit card – ideally, you should shop around for a card with the longest introductory period possible. You want 0% APR for as many months as you can qualify for with your credit score (this is why you need good credit)
- Once you have the card, move your balances – each balance transferred is usually subject to a balance transfer fee that’s typically around 3% of the balance transferred. So at $1,000, you’re looking at a $30 fee to move that balance.
- See how much you need to pay each month – the idea is to pay off your debt within the introductory period so that the debt is gone before a higher interest rate can be applied. So if you have $5,000 to pay off on credit card with an 18 month introductory period, then you need to pay $278 each month to eliminate the debt before that period ends.
- Make those fixed payments and don’t add to your debt – one key to consolidating debt successfully using a balance transfer is that you don’t make any new charges on your other credit cards until the consolidated debt is eliminated. Otherwise, you create more bills that may cut into the funds you’re using to eliminate debt.
- Once your debt is paid off, review your budget – your goal should be to adjust your monthly spending so you can afford daily expenses without relying on credit. You also want to put at least 5% of your income aside so you can start to cover emergencies without credit. Pulling out a credit card to make a purchase should be strategic – not something you do because you’re short on cash and can’t afford it otherwise.
With this strategy, you can consolidate and eliminate your credit card debt without any need for assistance. Then by revisiting your budget and making some adjustments, you can ensure you avoid ending up right back in the same bad situation that you were having with debt. You regain stability and if everything goes correctly, you should preserve your credit score.
What are the risks and downsides of consolidating debt this way?
The main downside of using a balance transfer credit card to consolidate your debt is that you can only transfer credit card balances. Other debts like medical bills, payday loans and personal loans can’t be transferred. So if you have a range of unsecured debts that need to be consolidated, you can’t just transfer the balances.
However, if you get a balance transfer credit card that offers a 0% APR introductory period on balance transfers AND purchases, then you can still make this type of debt consolidation work:
- Transfer all of your credit card balances
- At the same time, use the credit card to pay off other debts, such as medical bills
- Once you’ve either transferred or paid all of your debt off with purchase transactions using that card, see where you balance is and determine the fixed payments that you need to make.
Again, just make sure you can pay off the balance in-full before the introductory period ends; otherwise, the remaining balance will be subject to a higher interest rate. This is why you can’t really use a balance transfer as a means of consolidating debt once your balance gets above a certain limit. Consider if you have $30,000 you need to pay off in 18 months, your monthly payments would have to be $1,667 to eliminate that balance in-full within that time frame. That’s just not possible on most people’s budgets.
Another risk of consolidating debt with a balance transfer is that you leave your other credit cards zeroed out. In other words, you now have zero balances on all of your reward and cash-back credit cards, so it can be really tempting to start charging on those cards again. However, you should really avoid using credit until your debt is eliminated. Otherwise, you can make your situation worse instead of better – you’re adding to your debt instead of eliminating it.
How can this negatively impact my credit score?
In most cases, as long as you execute a balance transfer strategy successfully and pay off everything you owe on schedule, your credit score should not be damaged. At worst, your credit score wouldn’t really change because the overall affect is neutral. At best your score may go up because you’re eliminating the large volume of debt you’re carrying around while building a positive payment history as long as you make all payments on time.
However, in certain circumstances a balance transfer consolidation strategy could hurt your credit score. Here are some scenarios:
- If you start charging on your other cards and increase your total debt rather than eliminating it, your credit utilization ratio would go up instead of down, meaning your credit score could decrease.
- If your debt load was too big or something changes in your financial circumstances so you miss payments because you can’t afford the monthly minimum requirements, this will negatively impact your credit history, which could decrease your score.
- If you apply for too many new lines of credit within a six month period, it can decrease you score. So if you apply for a balance transfer credit card around the same time you applied for a few other loans and credit cards, then it can decrease your score.
- If you close credit card accounts after you’ve transferred those balances it can affect the “age” of your credit history. Length of credit use isn’t a major factor in credit score calculation, but it is a factor. So if you close your oldest account or several of your older accounts, it could decrease your score.
On point #3, also keep in mind that credit card applications are never grouped together – each application counts as an individual application with its own credit check. This is different from loans like mortgages and auto loans, which when you apply for several loans within a small window of time as you shop around for the best rates and terms, all of those applications get grouped together so it doesn’t impact your credit score negatively as you work to find the best deal. By contrast, credit cards don’t have that allowance. So compare cards and choose the best one BEFORE you apply for anything.
On point #4, just remember that you don’t have to close a credit card just because you zero out the balance. If you’re really being strategic about using credit, you keep your oldest account open and active by using it to make a small purchase here or there and then pay off the balance in-full at the end of the month to avoid interest charges. The account stays in good standing and you don’t have debt hanging around on an old card that may not have the best interest rate or greatest rewards out of the cards you have.
What if this doesn’t work?
If you use a balance transfer and can’t pay off the debt quickly OR you have too much debt or a low credit score and can’t make this strategy work, you have other alternatives for consolidating debt:
- A personal debt consolidation loan is another way to consolidate debt on your own. You can usually get a low interest rate if you have a good credit score, so this can be a good option for mid-range amounts of debt that are too big for consolidating with the method described above.
- A debt management program is an assisted form of debt consolidation. That means you can use it even in spite of a bad credit score. It also works for large volumes of debt – people have consolidated up to $100,000 or more using the program and still managed to get out of debt in less than or around 5 years.
The really good news with both of these options is that you can include debt that was already previously consolidated using a balance transfer. So if you use the method described above to consolidate and then it doesn’t work, you can still consolidate in another way.