When to Consider a Balance Transfer
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week’s question came via email from Rebecca:
My husband and I are discussing the best way to pay off our huge credit card debt. As a backstory, I got a decent raise in September that allows me to redeem our two department store payment cards, and it looks like we’ll pay them off by June. Then we would like to invest the money that I invested in paying for these cards to pay off our AmEx. We have discussed two different methods and are curious which one is the most effective.
Option 1: Add my paying to the shops to my husband’s paying on Amex every month, so instead of paying about $ 700 with a card, we would pay about $ 1,000 together.
Option 2: Find a card with good balance transfer options, see how long their interest-free period lasts, take the amount I paid and multiply it by that number of months so we know how much to transfer and then he pays the same amount. as now, on Amex, and I pay my amount to a new card. We thought about it because it would increase the number of accounts we have (mine, according to Nerd Wallet, is bad), and it would increase the amount of credit provided, which would reduce the use of credit (also bad).
The interest rate on our Amex is a painful 26.49, and since he ran out of Macy’s, they won’t negotiate with us, we tried. We’re just trying to work on it and improve my credit score. Any help you could give us would be great.
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Play the game with credit
Congratulations on your promotion! This is a great step to pay off your debt, especially if interest rates continue to rise. With that in mind, Janet Alvarez, executive editor of Wise Bread , a personal finance forum, says you are right to see the second option as the leader, as more accounts will improve credit utilization, which is the second largest. a factor in determining your credit rating, and boost your credit. But she would have gone even further.
“If, after the end of the zero percent introductory annual interest rate promotion period, the new annual interest rate falls below the 26% charged by your Amex, then by all means transfer the entire balance to the new card now,” says Alvarez. “This is because you will pay less interest than Amex, both during and after the introductory APR period. It’s a no brainer. “
You need to keep in mind that there is usually a commission charged for balance transfers, “so if the difference in interest rates is at least a couple of percentage points, the new difference in annual income is effectively canceled out.”
Matt Schultz, Senior Industry Analyst at CreditCards.com, agrees.
“As anyone with credit card debt can tell you, interest rates can rise faster than you think, especially on high-interest rate cards like yours,” he says. “Anything you can do to slow this growth is a good idea. And while it may seem counterintuitive to attack credit card debt with a new credit card, this new card, if used wisely, can make a huge difference. ”
He offers a few words of caution. Above all, do not use increased usage and the interest-free period as a reason for overspending.
There’s always a catch
And “there are fees, limits and time frames that affect the way you process the card,” he says. However, you can avoid being charged by making purchases. Schultz said that with the card Slate by Chase does not charge commission for transfers, committed within the first 60 days, but it is not always possible. You also may not be able to transfer your entire Amex balance, depending on card limits.
In addition, if you are 60 days late with your payment, the zero percent offer may be withdrawn. And make sure you know what interest rate you will be paying at the end of the introductory period.
“However, the truth is that using the card correctly to transfer the balance can save you a fortune in interest,” says Schultz. “Now is the perfect time to dump your debt. Interest rates are already at an all-time high and will continue to rise, so that debt will become more and more expensive. “
And do not close your Amex once it is paid, or you risk lowering your credit usage and your rating.
“Just use it sparingly and avoid accumulating debt that you cannot manage effectively,” says Alvarez.
All of this goes to show that it is entirely possible that you will not get approval for a balance transfer card, especially if you have bad credit. “It’s important that they don’t just apply for each balance transfer card, as this will further downgrade their rating,” says Jill Gonzalez, an analyst at WalletHub.
Therefore, check your credit rating to make sure it is at least 660 before starting your application. If so, look for your best deals, paying particular attention to the fees charged. WalletHub , NerdWallet, and CreditCards.com all have a wealth of information on the best balance transfer options.
“If, on the other hand, they cannot qualify for a balance transfer card, they should work to pay off the Amex debt under the first option as soon as possible so they can rebuild their credit,” Gonzalez says.