As 2009 nears its close, many people start thinking about their New Year’s resolutions. My recommendation: get out of credit card debt. Many consumers today are paying significantly higher interest rates than they were a year ago. And, according to the Wall Street Journal, the average household is currently carrying $8,083 in credit card debt, up from $7,489 three months ago. One of the reasons credit card debt is up close to 8% in this short period lay in the fact that some consumers are paying 20% or more in interest. However, even a consumer with an average interest rate of about 15% can save close to $1,000 in a single year by taking advantage of a 0% balance transfer.
How Balance Transfers Work: If you are not familiar with balance transfers, this section will cover the very basics. Essentially, a balance transfer transaction involves moving the debt from a high interest card to one with a low introductory rate that is usually 0% for 6 months to 1 year. During this period, you pay no interest on your credit card debt, which allows you to pay down your principle quicker.
For example, a person with a 15% interest rate would pay about $100 a month in interest. With a 0% rate, that $100 wasted on interest instead pays down your credit card debt. Thus, if you continued to pay the same monthly amount on your credit card during the 0% period, you avoid $1200 in interest and reduce your $8000 balance to $6800. If you typically pay $300 a month, you could reduce an $8000 balance almost in half during one year. Without a 0% balance transfer, a $300 monthly payment would only reduce your debt by about 25%.
Choosing a Balance Transfer Credit Card: Okay, you decided you want to save $1,000 this year and have a plan to start paying down your credit card debt. The next step is finding the right credit card. As a result of the credit crunch, most credit card companies have shortened the length of balance transfer offers and increased the fees. A year ago, most credit card companies offered 0% rates that lasted a full year. Today, most offer 0% rates for 6 months. However, it is still possible to get a credit card that offers a 0% APR on balance transfers for 1 year. Unfortunately, you will likely have to pay a 3-5% balance transfer fee.
In the past it was possible to avoid balance transfer fees, but today, they are a basic cost of doing business. And, while they may seem steep, consider the balance transfer fee as your interest rate. If you are currently paying 15% interest and you switch to a 0% balance transfer card with a 5% balance transfer fee, you’re paying 67% less in interest and fees than you would without the balance transfer.
Using the example of a person whose credit card has a 15% rate and an $8,000 balance, a 0% for 1 year transfer with a 5% fee will cost $400, but save close to $1200 in interest. This is a net savings of $800. I hardly think a 5% fee is a good reason to choose not to save $800.
Applying for a Balance Transfer Credit Card: Once you’ve found a credit card that offers a 0% rate for a full year on balance transfers, the next step is to apply online. When you apply online, do not transfer balances with your application. Why? Wait until your card arrives in the mail so you can review the complete terms and conditions, long term interest rate, and credit limit. Some companies advertise a 0% APR for up to 12 months and allow customers to transfer balances online, but may approve applicants for a mere 6 months. If you transfer balances online, you may not find out your 0% rate only lasts six months until too late. Thus it is better to be safe than sorry.
Overall, balance transfers are a great way for anyone with credit card debt to reduce monthly interest expenses and pay down debt faster. Without massive interest expenses, your monthly payment will go far in reducing your debt. And, with the smart use of multiple balance transfers over the course of two or three years, you can be credit card debt free in a fraction of the time it might take without Smart Balance Transfers.
For more information or to compare and apply for a balance transfer credit card, please use the navigation to your left to compare offers in the main section of Smart Balance Transfers.
December 21st, 2009 at 2:04 am
Informative post.