How a balance transfer can help with a large debt

Question for the expert

Dear Credit Wise,
I have $16,500 in credit card debt which is on my Discover at 13 percent APR. The other credit cards are all paid off. I can pay about $550 monthly on the debt. Would a credit card transfer be a good idea? Or if not, what other options do I have? I rent, not own, my townhouse. -- Sue

Answer for the expert

Dear Sue,
You have three options for taking care of this debt. Your first option is to do nothing and to continue paying on this card as you are now doing. Assuming you are no longer using the card and adding to the balance, if you pay $550 a month on this debt at the current rate, you will have it paid off in 37 months -- about three years. Along the way, you'll pay about $3,560 in interest.

Taking this approach will mean you still have the card and its purchasing power if you need it and you will likely improve your credit score by making timely payments. The downside to this approach could be you may be tempted to use the card and find yourself in debt again. The fact that your other cards are all paid off tells me you would like to be able to say the same thing about this card, which would be my advice.

A balance transfer could be a good idea for you if you qualify. Be aware that you do have a rather large balance and you may not be able to transfer the entire amount to another card. You may find that you will qualify for a transfer, but only for a part of the balance and you would then have two accounts to pay on each month. The amount you are offered will depend on your credit score; generally you must have excellent credit to qualify. You should also know that multiple inquiries for credit can hurt your score, so you need to be fairly certain that you will qualify before you apply or you run the risk of bringing down your score by applying to several different credit card companies.

Your strategy with a balance transfer should be to find the offer that has the longest, lowest introductory rate and the lowest fee, with the lowest possible post-intro rate. In the market today, the most common balance transfer offers have an introductory rate of 12 to 18 months at 0 percent, a fee of 3-4 percent, with a post-introductory rate of about 15 percent. That's the benchmark; you should try to beat it.

Let's take a look at the numbers, using the 0-percent balance transfer payoff calculator. A great deal for you would be an 18-month intro period, with no fee, and a post-introductory rate of 12 percent. Assuming a $550 monthly payment, that would get you out of debt in 25 months, cutting a full year off your debt, and reducing your total payments by about $2,000. An average deal (12 month intro APR of 0 percent, 3 percent fee, post-intro rate of 15 percent) would get you out of debt in 33 months. Here's how the numbers stack up:

  Payment Intro rate Fee Regular rate Interest paid Months to payoff Total payments
Current payments $550 NA NA 13% $3,563 37 $20,063
Great balance transfer deal $550 0%, 18 mo. $0 12% $466  25 $16,966
Average balance transfer deal $550 0%, 12 mo. 3% ($495) 15% $1,538 33 $18,533

In order to take full advantage of a 0 percent rate you will need to come up with more money monthly to pay toward the debt. If you get 18 months with no fee, you will need to pay $917 monthly to pay off the debt interest-free; for 12 months with a 3 percent fee, the monthly payment would be $1,416, which is more than double what you say you can afford.

The third option available to you could be a debt management plan through a noxnprofit credit counseling agency. You can find a qualified agency through either the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. While you will probably not be offered 0 percent on a DMP, the interest rate should be less than the 13 percent you are now paying and will remain in force for the life of the program, which will be five years or fewer. Programs such as this also provide significant education resources as well. Be aware that if you choose this route, your account will be closed and you will be discouraged from obtaining new credit cards while you are on the program. You did not say if this card is at or close to its limit but, if it is the impact to your score by closing the account will be negligible. This is because being at or close to your credit limit has already had a negative impact on your score. As you make timely payments through the DMP, your score will recover and should be higher by the end of the program.

No matter which option you choose, know that you can always pay more if circumstances change. Doing so will only lessen the time until you are debt free. Look at your monthly expenses and see if there are areas you can reduce; use any extra money you receive through raises or refunds to pay toward your debt.

Be wise with your credit!

See related: 2015 Balance Transfer Survey: Offers more generous, but move fast, 9 baby steps that lead to big financial goals

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Updated: 01-20-2018