Paying off debt can be a major challenge, especially when you have high interest credit card debt. The average APR on credit cards is typically around 17% or more, and some cards have interest rates well over 20%. If you’re paying interest because you haven’t paid off your balance in full, a good chunk of your monthly payment will likely go towards those unnecessary interest charges.
The good news is that there is a smart debt repayment technique that could make paying off credit card debt easier. The bad news is that a recent Ascent study of Americans’ credit card preferences shows that the majority of Americans have never used this technique.
One Email a Day Could Save You Thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our Confidentiality declaration and terms and conditions.
This method of credit card reimbursement can be a silver bullet – if used responsibly
So what is this debt repayment technique that so many cardholders sleep on? Balance transfer.
The Ascent found that only 38% of survey respondents had consolidated credit card debt with a balance transfer. About half of baby boomers said they transferred a balance compared to one-third of millennials.
Balance transfers involve transferring the balance from one or more credit cards to a new card that carries a 0% interest rate for the first few months. The best balance transfer cards do not charge any fees for balance transfer. However, no credit card is forever without interest; once the promotional period ends, the interest rate will climb to double digits.
Suppose you owe $ 3,000 on a card that charges you 17% interest and you pay $ 200 per month. If you were to transfer this balance to a card that charges no interest for the first 15 months and continue to pay $ 200 per month, then you would have fully paid off this debt during the promotional period. and save $ 400 in interest. You would save so much because every dollar of your payment goes to pay off your balance, rather than enriching your creditor through interest charges.
What to know about transferring a balance
If you want to save on interest and make it easier to pay off your debt, you might want to join the minority of Americans who have used a balance transfer. But you have to be smart about the process.
First of all, you need to find a good balance transfer card. Some cards do not offer promotional 0% rates or only offer them for a very short period of time, and some cards charge a fee for transferring a balance. Avoid these cards. And make sure you choose a card that you can qualify for based on your credit and that doesn’t charge an annual fee, which could reduce your savings.
Ideally, your monthly payments will be large enough to pay off the balance in full when the 0% rate expires. Otherwise, your interest charges could go up again. You can always try to transfer the remaining amount to a new balance transfer card, but there is no guarantee that this will work.
If you can’t pay the balance before the promotional rate expires, you can still save money by staying that long without paying interest. It all depends on the size of the remaining balance and how the standard interest rate on the balance transfer card compares to your current debt rate.
If you’ll still have a ton to pay off after the promotional rate expires, you might be better off considering a personal loan to pay off credit card debt. Personal loans generally have a longer repayment period than the 0% promotional period for balance transfers, and the interest rate during the entire repayment period is generally lower than credit card rates, although it is not 0%.
If you choose to transfer a balance – or refinance with a personal loan – you also need to make sure you don’t top up the cards you transferred the balance from. Otherwise, you will only be in more debt because you will have the balance transfer card or the loan. more a new balance on your cards to pay.
You should consider balance transfer cards
If you have credit card debt, consider joining the minority of Americans who have used a balance transfer to pay off what they owe. If you can be responsible for paying off your debt and won’t top up your existing cards again after you’ve released your line of credit, a balance transfer can be a powerful tool in saving money.