To say that getting out of credit card is difficult is an understatement. A person with $5,000 in credit card debt paying a 14% interest rate can expect to spend close to $1,000 over the course of three years to be debt free. This figure assumes a steady monthly payment of $200 and no new charges.
Fortunately, consumers with good credit can reduce both the time and the money wasted on interest substantially by taking advantage of 0% balance transfer offers. Just how much you can save by transferring high interest balances to 0% credit cards may surprise you. During one year, a 0% balance transfer can provide over $400 in savings and reduce your overall debt by 45%. Below, you can analyze the savings on a month by month basis and see how you can utilize balance transfers to get out of debt in as little as two years while saving hundreds of dollars on interest.
|
Reduction of Debt with a 0% Balance Transfer |
Reduction of Debt without a Balance Transfer |
||||||
|
Months |
Fees |
Monthly Payment |
Ending Balance |
Months |
Interest |
Monthly Payment |
Ending Balance |
|
1 |
150 |
200 |
4950 |
1 |
58 |
200 |
4858 |
|
2 |
0 |
200 |
4750 |
2 |
57 |
200 |
4715 |
|
3 |
0 |
200 |
4550 |
3 |
55 |
200 |
4570 |
|
4 |
0 |
200 |
4350 |
4 |
53 |
200 |
4423 |
|
5 |
0 |
200 |
4150 |
5 |
52 |
200 |
4275 |
|
6 |
0 |
200 |
3950 |
6 |
50 |
200 |
4125 |
|
7 |
0 |
200 |
3750 |
7 |
49 |
200 |
3974 |
|
8 |
0 |
200 |
3550 |
8 |
46 |
200 |
3820 |
|
9 |
0 |
200 |
3350 |
9 |
45 |
200 |
3665 |
|
10 |
0 |
200 |
3150 |
10 |
43 |
200 |
3508 |
|
11 |
0 |
200 |
2950 |
11 |
41 |
200 |
3349 |
|
12 |
0 |
200 |
2750 |
12 |
39 |
200 |
3188 |
|
Total Fee Expense |
Total Payments |
Total Debt Reduction |
Interest Expense |
Total Payments |
Total Debt Reduction |
||
|
$150 |
$2400 |
45% |
$588 |
$2400 |
36% |
||
How Balance Transfers Help
After 12 months, a person who does a 0% balance transfer will reduce their debt by 45% and save $588 on interest. While standard balance transfer fees of 3% will reduce interest savings by $150, a person who uses a 0% balance transfer credit card will save $438 over the course of 1 year and reduce their credit card debt 16% more than a person who does not take advantage of a balance transfer.
If it is possible to obtain a new 0% credit card when your initial 0% period expires and you continue to make $200 monthly payments, your total credit card debt will be reduced to $432 at the end of 2 years. If you increase your payment to $240 a month during the second year, you will be debt free in just under two years!
Because it may be difficult to obtain a 0% APR a year from now, if we assume the interest rate on your new credit card goes from 0% to 14% and you continue to pay $200 a month, you will be debt free in 2 years and 4 months, having spent only $282 in interest.
Without balance transfers, getting out of $5,000 in credit card debt at a 14% interest rate will take a total of three years. In that time, you will have racked up $947 in interest expenses. Thus, even if you are only able to obtain a 0% APR for 1 year, you can cut your interest expense by over $600 and get out of debt 8 months quicker.
If, on the other hand, you are fortunate enough to qualify for a 0% rate today and again next year, you’ll be debt free in two years and close to $1,000 richer. This is a deal that seems too good to be true, but the numbers just don’t lie.