All of us had a difficult 2020. Because of the pandemic, tens of thousands of Americans lost their jobs, and more Americans are using credit cards to pay for groceries and household expenses. That means mounting debt for many families. One way to manage your credit card debt is with balance transfers.
According to a Pew Research Center survey, one in four adults has trouble paying their bills since the coronavirus outbreak, and one-third have tapped their savings and retirement funds to pay household expenses. Lower-income families have been especially hard hit; 46% report having trouble paying their bills, and 32% are having trouble paying their rent. Lower-income Washington state residents are among those hardest-hit by the coronavirus pandemic, especially minorities.
With 63% of Americans now living from paycheck to paycheck, losing one’s job can be disastrous. Families that lose their income often start relying on credit cards, which means new levels of credit card debt. Although overall credit card debt is down by 9% and balances are down an average of 14%—the first decline in over a decade—the number of credit cards has increased by 12 million or 2.4%. At the same time, 11% of Americans are “very stressed” about credit card debt (more than they are by mortgages, medical bills, and loans), and 29% of credit card holders are using their credit cards more for necessities such as food.
Managing debt, including credit cards, has become a growing concern during the recession, which is why more people are looking for ways to restructure their debt, including balance transfers.
Understanding Balance Transfers
If you are unfamiliar with the term, a balance transfer is a strategy to reduce the amount you pay on credit card debt by moving the debt to a credit card that costs less. The goal of a balance transfer is to restructure your debt to make it easier to manage payments and to save money over the life of the debt.
Most people use balance transfers to consolidate their debt, transferring the outstanding balance from multiple credit cards to a single credit card so you have only one payment. The idea is to transfer debt from cards with a high-interest rate to one with a lower interest rate to reduce your monthly payments, and to reduce the amount you will pay long term.
Many banks and credit unions offer great introductory deals and rates to encourage balance transfers.
When to Consider a Balance Transfer
Before you consider applying for a balance transfer, be sure you're getting a better deal. There are times when a balance transfer makes sense, but it's not always beneficial.
First, take a look at your existing credit card debt. Are you likely to pay it off soon? If so, you may not need to do a balance transfer. However, if you are carrying a substantial credit card balance and your credit card has a high annual percentage rate (APR), then consider using a less expensive credit card and transferring the balance.
If you have multiple credit cards with different APRs, it might be easier to consolidate your debt into one payment. If you have a credit card with a low APR and additional benefits, such as travel points or cash rewards, then consider a balance transfer.
When shopping for a new credit card or thinking about using an existing card to make a balance transfer, there are certain things to consider:
Does the card have a low interest rate?
Balance transfer credit cards have introductory interest rates that are substantially lower than average to attract new customers. The iQ Credit Union Visa card, for example, occasionally offers promotional balance transfer rates. When shopping for credit cards for a balance transfer, make sure you know what APR is and how long the introductory offer lasts.
Can you get points and perks?
Many credit cards offer additional benefits such as travel points, credit for online shopping, or even cash returns. If you use your credit cards to travel, to buy online, or for something else that reward points can help with, these benefits can be quite valuable.
Does it improve your financial situation?
The goal of a balance transfer is to simplify your finances. That could mean fewer payments, a lower monthly payment, or a better way to manage your cash. Consider whether a balance transfer to a new card will meet your financial objectives.
Can you pay the debt off faster?
Another reason to use a balance transfer is to reduce your debt faster. Will a balance transfer make it easier to make monthly payments? Will a balance transfer free money or credit for other costs or expenses? For example, a balance transfer might give you access to more credit for a major expense, such as a home renovation.
The Risks of Balance Transfers
Although balance transfers can be a valuable way to restructure your debt, they aren’t always a good idea. Sometimes they can create more financial problems than they solve, and they can add unexpected expenses. Keep these considerations in mind:
Avoid creating more debt.
Transferring credit card debt to a new card can help reduce your debt, but you still have your old cards. Rather than accumulating additional debt, cancel those old cards or put them in a drawer so you won’t use them.
Don’t pay more in the end.
Be sure you understand the terms of balance transfer credit cards, especially introductory rates. You don’t want to be surprised when a card takes on a higher APR or more fees once the introductory period is over.
Assess the potential risks to your credit score.
Having too many credit cards and carrying too much credit card debt can harm your credit score. You want to increase the overall amount of credit you have available but reduce the amount of credit you use.
Consider balance transfer fees.
Most credit cards also charge fees for balance transfers (although iQ’s Visa credit cards do not). Be sure you will still save more if you include the fees.
Not all credit cards have balance transfer options, but many do, including iQ’s Visa credit cards. The iQCU card features extremely competitive introductory rates and no balance transfer fees.
If you are worried about your credit card debt, consider making balance transfers part of your financial plan. Restructuring your credit card debt could be the first step in reducing financial stress and promoting financial well-being.