If you’ve received a credit card statement after February 22nd, you were likely shocked by the new minimum payment disclosures. By law, every credit card company is required to prominently display how long it will take to pay off your credit card balance by only making the minimum payment. For a small balance of $600 on a credit card with a 14% interest rate, I learned I would need 6 years to get out of debt-at a cost of over $600. And 14% is a relatively low interest rate.
Fortunately, there is a relatively easy way to save money on credit card interest and significantly reduce credit card debt at the same time. This is the balance transfer.
If you’re unfamiliar with balance transfers, they are rather simple transactions. Essentially, you move your high interest credit card debt to a new credit card that offers a low promotional rate, typically 0% for about one year. During the 0% interest period, your credit card balances don’t accrue interest. This not only saves you money on interest, but allows you to allocate money that would have been spent on interest to reducing your principle.
To shed light on just how much you can save on interest with a balance transfer, consider this example. Sheila has a $4,000 balance on a credit card with a 16% interest rate. Assuming she only makes slightly more than the minimum payment each month, she’ll spend over $600 in interest this year. If she transfers her credit card balance to a new card with a 0% interest rate, Sheila will not only save that $600, but also be able to use that $600 to reduce her outstanding balance. This not only saves her money in the short term, but helps her reduce the time needed to become credit card debt free.
Clearly, balance transfers are an effective tool to reduce credit card interest expenses. Unfortunately, there is no such thing as a free lunch, and balance transfers do come at a cost. Generally, this cost is a one time fee of 3-5%. However, this fee is nothing more than nuisance. For Sheila, a 4% balance transfer fee would cost $160. Since the 0% interest rate would save her $600, at the end of the year, she still would come out $440 richer. That is not a bad deal, especially given the fact that the whole balance transfer process can be completed in about 15 minutes or less.
-Jeffrey Weber
For more information on balance transfer credit cards, please see the credit card comparison section of Smart Balance Transfers, where you can compare offers and apply online for approval.
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