Balance Transfer Credit Cards: Should I Pay Off a 0% Card Fast?

by Virginia C. McGuire

Balance transfer credit cards can be a powerful tool for paying off credit card debt. When you have a high credit card balance, a big chunk of your monthly payment is eaten up by interest. Move that debt to a balance transfer card with a 0% introductory interest rate, and your entire payment can go toward reducing your debt. In turn, you might feel motivated to throw money at your balance and make it disappear.

But is that the best strategy? Let's take a look.

Paying high-interest debt first?

In general, it's a good rule of thumb to pay off the debt that carries the highest interest rate. The higher the rate, the more it's costing you over time. Therefore, it's often a good idea to look at all your debts -- car loans, student loans, credit cards and even mortgages -- and attack the one with the highest interest first.

But as with most rules, there are some notable exceptions. There's a strong case to be made for first paying off any debts whose interest rates are going to get much, much higher in the future. For example, balance transfer credit cards usually have 0% or low interest for only a limited period of time -- 12 to 18 months, in most cases. After that, the interest rate will shoot up. Your goal should be to eliminate your balance before that happens, even though it might not be your highest-interest debt at this particular moment.

Nerd note: Other possible exceptions to the "highest interest rate first" rule are mortgages and student loans. The interest you're paying on these loans is sometimes tax-deductible, which means you're being reimbursed for part of that interest in the form of a smaller tax bill. That means there's an argument for paying off other debts first -- even if they have a lower interest rate.

Mapping out your timeline

Once it's clear that paying off your balance transfer before the 0% rate expires should be a priority, the next step is to map out a timeline. You'll need to figure out how many months remain before your interest rate goes up and divide your total balance by that number. The result is the amount you'll need to pay monthly to get rid of your balance before the low rate expires. For example, if you owe $15,000 on your credit card and you have no interest for 12 months, you'd have to pay $1,250 per month to retire the debt before the rate goes up.

If necessary, figure out a Plan B

But what if you can't realistically pay off the debt before the rate goes up? Don't give in to despair, and don't start spending too freely on your other credit cards. The point here is to reduce debt, not increase it. In addition to sending your entire payment toward debt reduction, balance transfer credit card offers let you hit pause and reassess your finances.

Let's talk about actions you can take to manage your credit card debt and make sure it's the last time you ever deal with it:

  1. Tighten your budget. If you got into debt by overspending, you need to figure out how to live within your means. This is challenging for anyone. Start a dedicated savings account for big purchases and think about ways to reduce your spending and increase your income.

  • Create an emergency fund. Nothing can land you in debt like an emergency. A hefty savings account will help you prepare for the next emergency -- and there will be a next one. Saving up one month's worth of expenses is a good start, especially while you're trying to focus your efforts on paying down debt. After your credit card debt and other high-interest loans are retired, you can look into building up an even bigger rainy day fund.
  • Consider transferring your balance again. There's a good chance you'll be able to get another balance transfer offer when your current 0% interest rate runs out. This can buy you a little extra time, but this isn't a good long-term strategy. If you do go this route, make sure you're also thinking strategically about how to eliminate your credit card debt entirely. You don't want to find yourself moving the debt around indefinitely without really reducing it.
  • The bottom line: If at all possible, pay off the balance on your 0% credit card before the rate goes up. Also, consider this an opportunity to take a hard look at your spending habits and make plans to avoid racking up credit card debt in the future.

    Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @vcmcguire.