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#credit card transfer

#Follow these steps to slash your interest rate and debt repayment.

It's no secret Americans struggle with their finances. The average news reader can barely make it through a week without reading some story proclaiming millennials will have to retire more than a decade later than their parents, or that a third of adults have no retirement savings or the average American has an estimated $10,000 in credit card debt. While there may not be a magic fix for most financial woes, there is one product that can help those with credit card debt: a balance transfer.

What is a balance transfer?

A balance transfer is the act of transferring the balance of your debt from one lender to another. Why would someone want to do this? Because transferring debt comes with the benefit of slashing the associated interest rate.

Credit card debt often carries incredibly high annual percentage rates, which often range from 15 percent to even 28.99 percent for some store cards. The average APR of a retail credit card is 23.23 percent, according to a recent study by CreditCards.com.

Here's an example to show how a balance transfer could save you money:

If Kyle holds $7,000 on his Discover credit card at a 20 percent interest rate, and pays $250 a month toward the debt, it will take him 39 months and cost $2,507 in interest to pay it off, according to MagnifyMoney’s calculator .

By using a balance transfer to reduce the interest rate to zero, the $7,000 in debt could be paid off in 31 months and only cost $555 in interest and fees. Multiple balance transfers could reduce the debt repayment even more to only $376 in interest and fees.

Wait, there’s a fee?

Yes, there is often a fee to complete a balance transfer. Some people hear the word fee and are immediately reluctant to complete a balance transfer. However, depending on the amount of debt, the fee is usually substantially smaller than the amount of interest that will get paid if the debt is left with the original lender.

Let’s backtrack to the example of $7,000 at 20 percent APR. If Kyle doesn’t use a balance transfer he’ll pay $2,507 in interest alone to Discover.

Instead, Kyle decides to do a balance transfer to Citi Simplicity at a 0 percent APR for a 3 percent fee. Including the fee, it would only cost Kyle $555 to pay off his $7,000 in interest.

Even with a fee, Kyle would save almost $2,000 by doing a balance transfer.

However, if Kyle only had $700 in credit card debt at 20 percent APR and could pay $250 a month, a balance transfer wouldn’t save him any time and money. So, if you have a low amount of credit card debt you can pay off quickly, then the fee isn’t worth it.

The new lender didn’t take all the debt.

It may take more than one balance transfers to get an entire balance to a 0 percent promotional offer.

Returning to the tale of Kyle, he elects to do a balance transfer to Chase Slate, which offers 0 percent APR at a 0 percent fee for 15 months. Chase only takes $3,000 of Kyle’s debt, so he still has $4,000 at Discover at the 20 percent APR. If he leaves the $4,000, it will take 19 months and cost him $688 to pay it off.

Kyle could take one of two paths to reduce the interest rate on his remaining debt with Discover. He could call Discover and say he’ll transfer the remaining balance – unless they reduce his interest rate. Discover probably wouldn’t reduce it by more than 2 to 5 percentage points, but every little bit counts.

If Discover doesn’t want to play ball, Kyle could look to transfer the remaining $4,000 to another lender, thus reducing his interest rate to 0 percent. Even with a 3 percent fee, this option would save him more money than leaving the balance with Discover, unless Discover magically dropped the APR to zero.

Will this impact my credit score?

In short: yes.

Applying for new lines of credit will cause a credit score to drop. However, opening a new credit card usually only drops a score by about five points, according to FICO’s website.

Only people with good to excellent credit will get approved for the best balance transfer offers. So make a plan and decide how many times you’re comfortable applying for a balance transfer. Those with a 740 score or higher could safely apply for three or four without doing much damage to their score. One caveat: If you’re applying for a mortgage soon, don’t apply for any new lines of credit six months in advance.

Keep in mind; A credit score isn’t a trophy. A credit score should be used to help save you money and get you the lowest interest rates. Don’t leave it just sitting on the mantle looking pretty.

This seems too good to be true. What are the traps?

Banks love debt because it makes them lots of money from simply charging interest. Lenders offer 0 percent promotional offers in the hopes people will transfer their debt, and then slip up and end up paying interest.

Here are some of the traps to avoid:

1. Never spend on the card . Once you transfer your balance to the new card, lock the new card away. Any spending you do on the card will immediately accrue interest at the purchase APR and not the promotional APR.

2. Pay on time. A single late payment could be grounds for the lender to revoke the 0 percent promotional rate and hike to a penalty rate (typically near 30 percent).

3. Have a plan for when the promotional period ends. If you’re unable to pay off the entire balance before the 0 percent promotional period ends, start looking around for another card. Multiple balance transfers can help you pay down the debt quickly and save hundreds to thousands of dollars.

How to do a balance transfer?

Shop around for the best balance transfer offers before you apply for your first one. Don’t forget to explore offers from credit unions.

Most banks or credit unions allow people to complete a balance transfer online. Once approved for the balance transfer, you can use an online portal to transfer the balance from an existing lender to the lender providing the balance transfer.

Be sure to complete this step within 60 days of being approved. Otherwise, the promotional offer can be nullified.