By Andrew Housser
Whether you knowingly signed up for a credit card with a high annual percentage rate (APR) or you received a notice stating that your rate is going up, you have three options: pay significantly in finance charges with the high-interest card; stop using the card and pay off the balance as quickly as possible; or transfer the balance to a new, lower-interest card.
If you are not able to knock out the debt in a short amount a time, transferring the balance to a creditor that charges lower interest can be a smart choice. Before you make that change, though, follow these steps.
1. Call your existing credit card issuer.
Creditors are not going to come to you with an offer to lower your interest -- you need to reach out to them. If your credit is good, you've been a loyal customer, or you've been improving your credit by making on-time payments for a year or more, call your credit card company and ask if they can lower your interest rate. Let them know if other companies offering you a lower rate have contacted you as well. Tell them you are prepared to transfer your balance, if necessary. 2. Review your debt.
Most companies limit the amount you can transfer. But even if you can only transfer a fraction of your debt from one or two cards, the savings from the lower interest still may be worth it.3. Check out the fees.
Fees for conducting balance transfers are practically a given unless your credit score is stellar. (Even then, 0 percent APR offers are tough to come by these days.) Most companies charge a 3 to 5 percent fee on the transferred amount, which means fees of $150 to $250 to transfer $5,000 in debt. That may be a reasonable amount if your current APR is high. Still, make sure to do the math to determine whether the transfer fee wipes out any potential interest savings.4. Think long term.
Low interest rates don't last forever. By law, credit card companies must give you 6 months at the introductory rate, and some will give you as much as 12 to 18 months. But if you haven't paid off your balance transfer amount by the time the promotion ends, your interest rate and finance charges could skyrocket. Before you make the move to a new card, figure out how long it will take you to pay off the transferred debt in full. If it's longer than the promotional period and the APR is high once the promotion ends, you may be better off staying with your current creditor and figuring out a way to pay off that debt faster. 5. Don't add more debt to your new card.
Once you've transferred your balances to a low-interest credit card, focus on paying off that debt, not adding to it. Keep in mind that most issuers have different rate policies for balance transfers, new purchases and cash advances. Read the fine print. It is possible that while your balance transfer is only accruing an interest rate of, say, 4.9 percent, new purchases or cash advances will be hit with double or even triple that amount. One smart way to avoid the temptation of using your new plastic: cut up the card as soon as it arrives (destroy the old card as well to keep from racking up new debt with it). Your account will remain open to pay off your debt, but you will eliminate the temptation to use it further.6. Consider the effects on your credit score.
Making a balance transfer may save you money, but it also could hurt your credit score. Your credit rating drops any time you apply for a new line of credit, open a new account, or transfer a balance to a credit card with a lower credit limit than the old one. Of course, if a balance transfer can help you make your payments, that could outweigh any negative impact of the new line of credit.
No one wants to pay high interest on debt if they can avoid it. Still, it's important to weigh the pros and cons when shopping around for a better credit card deal. Depending on your situation, switching could save you hundreds of dollars in interest charges each year.