Credit card debt hit a record high. Here’s one way to pay it down.

Zero-percent interest balance transfer offers are plentiful, and while helpful, they do have cons.

American households racked up $986 billion in credit card debt the last three months of 2022, a record high, according to the Federal Reserve Bank of New York. (Elise Amendola/AP)

It was inevitable.

Although inflation is easing, many Americans are struggling and have turned to credit cards to bridge the gap between their earnings and higher expenses.

Credit card balances jumped to $986 billion in the fourth quarter of 2022, surpassing the pre-pandemic high of $927 billion, according to new data on household debt from the Federal Reserve Bank of New York.

During the pandemic, many consumers began paying down debt. With stores closed and state-mandated stay-at-home orders in effect, people curtailed their spending and credit usage. The U.S. savings rate as a percentage of disposable personal income rose dramatically, hitting a record 33 percent in April 2020. It fell to 3.4 percent in December.

That was then. This is now.

Even as delinquency rates remain relatively low, the New York Fed says there are “signs of stress” among younger cardholders, who are beginning to miss some payments.

“One contributing factor may be rising interest rates,” the New York Fed said. “As interest rates rise, so does the cost of borrowing, and higher interest rates result in higher minimum monthly payments for credit card balances.”

So what can you do to get a handle on this debt?

One strategy is to transfer your burgeoning balance to another card with zero percent interest for a limited time.

This option might surprise many people: A Bankrate survey found that 37 percent of consumers carrying credit card debt don’t know that balance transfer offers exist.

“In some ways, these offers are hiding in plain sight because they are widely available, but they’re not necessarily widely known,” said Ted Rossman, senior industry analyst for Bankrate. “I really think this could be the best way to get out of credit card debt relatively quickly at the lowest possible cost.”

Despite the steady rise of interest rates due to the Federal Reserve’s efforts to drive inflation down, balance transfer offers are plentiful.

“If you have debt, and about half of cardholders do, this could be an amazing deal,” Rossman said.

I’m not a fan of using debt to pay down debt, but there is a good case for using a balance transfer to speed up a debt reduction plan. Here are the pros and cons to consider when looking at such zero-percent promotional offers.

Pros

Interest savings: The average credit card interest rate is 20.30 percent, according to the latest figures from CreditCards.com.

Here’s an example from Bankrate of how much you could save:

Suppose you have $5,805 in credit card debt (the average borrower’s credit card balance, according to TransUnion) and moved it to a zero-percent card for 21 months. You could pay it off in less than two years with a monthly payment of about $276. But that same $276 outlay at the average rate of 20.30 percent would take 27 months to erase and include over $1,430 in interest.

Imposes discipline: With discipline and extra funds, you could make significant payments on your credit card without transferring the debt to another card. But there’s no pressure to stick to your plan.

With a promotional offer that imposes a deadline, you may be more likely to pay off debt faster. Plus, once the offer expires, the interest rate is often higher than the old card.

Many people qualify. Generally, zero-percent promotions are available to consumers with credit scores of 670 or higher, according to Rossman.

Because the average FICO credit score is 716, many applicants should qualify, he said.

Cons

A possible transfer fee: It can cost you to transfer the debt. Typically, 3 percent of the balance.

Using the example above, if the transfer fee is 3 percent, it would cost $174 to move the debt to another card. It’s not a lot of money, but it’s wasted if you don’t pay off the balance in time.

There’s also been a small uptick in the number of cards charging 4 percent or 5 percent for a balance fee instead of the usual 3 percent, according to Matt Schulz, chief credit analyst at Lending Tree.

It dings your credit score: When you apply for credit, a lender will pull your credit report, and that action is called a “hard” inquiry. The credit models take into account whether you are actively seeking to borrow. New credit activity determines 10 percent of your score.

Depending on your credit history, a hard pull might knock your credit score down five to 10 points for a few months, Rossman said.

Despite the temporary hit to your credit score, the balance transfer could help your credit score in the long term.

“It should lower your overall credit utilization ratio because you have more credit, but also you’re paying down your balance more quickly,” Rossman said. “So I wouldn’t really worry so much about the credit score impact. I think you have more to gain. ”

It’s a long shot, but check if your current lender is offering a promotion for a zero-percent balance transfer offer. You may still have to pay the balance transfer fee, but you wouldn’t have to apply for a new card.

The promotional period may be too short: Balance transfer offers have relatively short lives. Many offers right now range from 15 to 21 months.

Be realistic. Would you be better off sticking with the card and interest rate you have? After the promotional period, you may face a higher interest rate if you haven’t paid off the balance.

Once the term expires, consumers may face rates of 17 percent on the low end or close to 30 percent on the higher side, Rossman said.