High-interest debt can be frustrating to deal with, especially if you’re trying to turn things around with your finances. Trying to tackle debt when you have high interest rates on your balances can lower your chances of overall success with your efforts.
One way to make debt a little more manageable is to use a balance transfer to reduce your interest rate. However, not everyone is approved for a balance transfer. Let’s take a look at how a balance transfer can help — and review your options just in case you’re turned down for a balance transfer.
What Is a Balance Transfer?
A balance transfer is a way to move your debt from one creditor to another, and it is different from a debt consolidation loan. In general, with a balance transfer, the remainder of your loan is taken over by another lender — and there’s usually a lower interest rate. It’s possible to use a balance transfer on multiple loans as well. You could potentially use a balance transfer to move three debts into one so that you would only have to worry about one payment.
In many cases, a balance transfer involves using a credit card to pay off your other debts. The balance transfer interest rate might be as low as 0% APR. It’s not always 0%, however. It might be 1.99% or up to 5.99%. On top of that, the low rate might only last between six months and 24 months. As a result, the most effective balance transfers involve making a plan to pay off the debt before the end of the introductory period.
With a balance transfer, the debt isn’t gone, but it does generally cost less. You still have to repay what you owe, but the payments might be smaller and more affordable. Additionally, with a lower interest rate, more of your payment goes toward reducing your balance.
How a Lower Interest Rate Helps You Pay Off Your Debt Sooner
When trying to reduce your debt, a balance transfer can help by reducing how much of your payment goes toward servicing interest. With a high interest rate, less of your payment goes toward reducing your principal, or the amount you originally borrowed.
With a balance transfer, you have the chance to reduce that rate, and more of each payment reduces your principal, or what you still owe. You speed up the repayment process and save money and are out of debt much sooner.
Here’s how it works:
Let’s say you have $1,000 in debt at 17.99% interest. If you pay $25 per month, it will take you 47 months to pay it off, and the interest will cost you $402.36. Not you do a balance transfer, though, and the new interest rate is 2.99%. You decide you can pay $30 per month — just $5 more per month — and you will pay off the debt in 34 months and only pay $44.63 in interest. That’s a big cost saving.
If you could pay even more each month, you could be out of debt sooner and save even more money.
Pros and Cons of a Balance Transfer
Before you move forward with a balance transfer, it’s important to weigh the advantages and disadvantages of using this approach.
What to Do If You’ve Been Rejected for a Balance Transfer
Not everyone is eligible for a balance transfer. In some cases, you might need good credit to qualify. If you’ve been rejected for a balance transfer, you still have some options, however.
Debt consolidation loan
Rather than doing a balance transfer, you could potentially use a debt consolidation loan. This is another way to get all of your debts in one place. With this type of loan, you use a bigger loan to pay off the smaller loans. In many cases, you can get a larger debt consolidation loan than what you’d get with a balance transfer.
The interest rate is usually lower than the combined interest rates of all your debts. With a debt consolidation loan, however, you don’t have to worry about the end of a promotional period. Instead, you have a fixed payment and a fixed rate for a set period of time.
If you have more debt and you need a longer time to repay it, a debt consolidation loan can be a better choice than a balance transfer.
Contact your credit card company
In some cases, if you have credit card debt, it can make sense to contact your company and ask for a lower interest rate for between six and 12 months. You might not get the same deal as you would with a balance transfer, but a lower rate for a few months can help you tackle your debt and reduce your principal.
If you let your credit card issuer know that you’re shopping around for a balance transfer card, you might be able to get a lower APR. Some card companies are willing to lower the interest rate to keep a customer who has been good for business.
Get a personal loan with a co-signer
Because some balance transfers require good credit, you might not be able to qualify if your credit score is relatively low. In this case, you might be able to get someone to co-sign on a personal loan. Your co-signer accepts joint responsibility for the debt, so you need to make sure that you’re prepared to make your payments if you don’t want to strain the relationship.
There are also some lenders that offer joint accounts. If you have someone who is willing to be a joint borrower with you, you might be able to get a low rate on a personal loan and use it to pay off your higher-interest debts.
Take measures to improve your credit score
If you were turned down for a balance transfer because of your credit, it can make sense to take steps to improve your credit score. Some strategies that can be useful as you boost your credit include:
- Make your payments on time to improve your credit history.
- Pay down some of your credit cards if you can. This will improve your credit utilization.
- Correct mistakes in your credit report. If wrong information is dragging on your credit score, having it corrected can help you improve your credit score.
It can take a few months to see results, so you need to be consistent if you’re trying to improve your credit score.
Pay down debt
Even if you don’t get a balance transfer or a debt consolidation loan, it’s possible to tackle your debt — as long as you make a plan. There are different ways to create a plan to attack your debt and pay it down over time.
Most debt pay-down plans require you to make a list of your debts, including monthly payments and interest rates. Then, you figure out how much you can put toward your debt each month. Start with one debt and apply that extra amount on top of your minimum payment each month until the debt is paid off. There are two main ways to order your debts:
- Debt snowball: Order your debts from the lowest balance to the highest balance. You start with the debt that has the lowest balance and tackle that quickly. Once that’s paid off, you take the minimum payment from your first debt and the extra payment amount and add it to the next debt. By the time you reach the end of your list, you have all your debts paid off.
- Debt avalanche: Works like the debt snowball, but you start with the debt that has the highest interest rate. Mathematically, this works out to save you more and pay off your debt faster.
Other strategies that can help you pay off your debt include:
- Use a windfall to pay off portions of your principal whenever you get extra money.
- Taking on a part-time job or starting a side hustle to make extra money to put toward debt reduction.
- Make small weekly payments of extra money, in a strategy called “snowflaking” to reduce your principal as you go along. This strategy is added on top of the other steps you’re taking.
Once you have a plan you can stick with, getting out of debt becomes more manageable.
Frequently Asked Questions (FAQs)
Why don’t I qualify for a balance transfer?
In many cases, you need a minimum credit score to qualify for a balance transfer. If your credit is in the fair to poor range, you might not qualify.
Can a debt consolidation loan help me pay off debt?
Depending on your situation, a debt consolidation loan might help you pay off debt. You can get all of your debts in one loan, with one payment and one interest rate. This can make it more manageable and help you pay off debt faster.
Will a balance transfer impact my credit score?
If you just move money from one of your credit cards to an existing card, it won’t likely have a big impact on your credit score. However, if you apply for a new loan, you could see a small impact to your score. On the other hand, if you get a balance transfer with a new card and free up credit utilization, there are some instances when a balance transfer might improve your credit score.
