This One Trick Can Save You Thousands in Credit Card Debt
There isn’t a way to magically make your credit card debt disappear, but there is one “trick” that will help you save anywhere from hundreds of dollars on up to thousands of dollars. If you have debt on a high-interest credit card, then a balance transfer credit card might be just what you need to become debt-free.
How a Balance Transfer Works
Some of the details might vary a little by issuer, but the basic concept is the same. Balance transfers aren’t difficult, but it will be easier to grasp the whole process with an example.
Let’s say you have a $10,000 balance on credit card A and your interest rate, or APR, is 19 percent. This makes you unhappy, of course, because you’re paying interest on this big balance. So you decide to apply for a balance transfer card that offers a zero percent introductory APR for 18 months. This means that you can transfer the $10,000 on credit card A to your new balance transfer card, now known as credit card B, and you won’t have to pay interest on it for 18 whole months.
When the issuer of credit card A completes the transfer of your $10,000 balance to the issuer of credit card B, you will start making payments on credit card B. Your goal is to pay off the debt, now on credit card B, although that could be hard since it’s a huge balance. At the very least, this gives you an opportunity to save on the total amount of interest you would have otherwise paid. Note: Our hypothetical issuer charges a 3 percent balance transfer fee, so you’d be paying back $10,300, not just $10,000 (10,000 x .03 = 300).
How much would you save? The numbers are a bit scary. If you make only minimum payments (around $200 per month) on the $10,000 balance, it will take you 605 months, or 54 years, to pay it off! You’d pay $35,635.91 in interest.
Now, let’s get more aggressive with the debt. To pay off the $10,300 during the promotional period, 18 months, you need to pay $572 per month for 18 months. If you were paying 19 percent interest during that time, you’d be paying $1,618 in interest.
What Can Possibly Go Wrong?
Well, plenty. When a balance transfer works and you get out of debt, it’s a dream come true. But if you don’t pay close attention, this “trick” can quickly become a nightmare.
Here’s a list a few things you need to stay on top of:
- Don’t stop paying on your first card (credit card A in our example above) until you’ve confirmed the balance is zero and the transfer is complete. It can take a few weeks for the transfer to complete.
- Be aware that most cards have a balance transfer fee and this ranges from 3 percent to 5 percent. Add this fee to the total amount you have to pay back.
- Figure out how much your monthly payment must be to pay off your debt during the intro period. Take your balance (including transfer fee, if any) and divide by the number of months in the intro offer. Your goal is to pay it off or substantially reduce the amount before the “go-to” rate kicks in.
- Make a vow that you won’t use your new balance transfer card to make new purchases. This card should be used as a tool to pay off your debt. Not to add to your debt!
- Make sure you never make a late payment. If you do, you might lose the zero percent intro rate.
If you can’t pay the credit card debt off completely, that’s okay. You can’t create money out of thin air. But be aware that you’ll begin paying the purchase APR rate on your remaining balance when the intro period ends.
There Is a Catch…
The balance transfer credit cards with the best terms require excellent credit. You might slide by with a very good credit score, but the higher your FICO score, the better. If you only have fair credit, then it doesn’t hurt to take a look at cards targeting the fair credit crowd. A few offer decent balance transfer terms.
Another option for you might be a debt consolidation loan, or personal loan. You won’t get a zero percent APR, but you might end up with a rate that’s much better than the one you have right now. And if you have debt across several credit cards, a debt consolidation loan will simplify your life. You’ll be making one payment a month to pay off your debt as opposed to paying multiple bills.