Getting financially fit is the second most common New Year’s resolution, after weight loss, of course. For many Americans, getting financially fit means dropping the weight of credit card debt.
Even if you’ve already stumbled and screwed up (or forgotten) your New Year’s resolution, there are plenty of months left in the year to get on the path to financial prosperity.
Start the journey by understanding the traps of credit cards and how to release yourself from the shackles of consumer debt.
No, You Don’t Need to Carry a Balance
Carrying a balance on your credit card does not always help you build a strong credit score. It only costs you money in interest owed to the bank.
This myth likely is a misunderstanding by people who fail to realize the difference between carrying a balance and receiving a statement.
Yes, you need a charge to show up on your statement – preferably a small one(s) that uses less than 20 percent of your overall credit limit. This helps to establish you’re using credit and can use it responsibly.
But as soon as that statement comes in, pay it off in full.
If you’re carrying a balance (aka credit card debt) because you think it helps your credit score – stop. Tweet this
If you don’t, it’s simply costing you more money in interest.
If you have a balance because you charged more money than you can afford to pay off, here are a few strategies to help dump that debt quickly.
Slash Your Interest Rate
Believe it or not, banks and lending companies will compete for your debt.
No, that doesn’t mean you can avoid paying. It means Bank B is willing to offer a great deal in exchange for moving your debt from Bank A.
Why? Because banks make lots of money off of interest, and Bank B is betting you’ll eventually skip a payment and start owing interest.
However, if you’re smart about it, you can surf your debt around and end up paying very little in interest thanks to a balance transfer.
A balance transfer offer typically involves paying a fee to move your debt from Bank A to Bank B and then receiving 0 percent interest (or a low rate) for a set period of time – often 12 to 24 months.
During the 0 percent APR period, all of your payments go directly to paying down the principal debt, meaning you can pay it off faster and save money on interest.
Some people dislike the idea of paying a fee, but simply do the math to see if the fee is less than the amount you’d pay in interest to your current bank.
For example, say you have $7,000 in credit card debt at a 17 percent interest rate and can pay $200 a month. It will take just over four years and cost $2,735 in interest to pay it all off.
With one 12-month, 0 percent balance transfer with a 3 percent fee and a 15 percent APR after the promotional period, it will take just under 3.5 years and cost $1,155 (including the fee).
Multiple 0 percent balance transfers with a 3 percent fee would only cost $438 in interest and fees. Plus, it would be paid off in 38 months.
Use this tool to see if a balance transfer is worth it for you.
Avoid Potential Traps of a Balance Transfer
A balance transfer is a helpful debt-eradication tool, if you use it properly.
Banks are willing to offer competitive deals like 0 percent APR for 15 months because they hope consumers will stumble and end up paying them high interest rates on the debt.
Here’s how you avoid falling into a bank’s potential trap:
- Immediately put the balance transfer card in the freezer – figuratively and literally. Avoid spending on the card while you pay down the debt. Usually, purchases made on the card do not receive the 0 percent APR promotional rate, which can just rack up more debt.
- Complete the balance transfer within 60 days – otherwise, your promotional rate may be revoked.
- Never miss a payment – or risk losing the promotional rate and having the APR shoot back up, or even higher, than it was before. Missing a payment also has a big impact on your credit report and score.
- Be prepared for the end – if you have a 15-month promotional rate, but it will take 25 months to pay down the debt and find a new deal before the end of your first promotional rate. Multiple balance transfers can help pay down the debt faster. Just because you complete one balance transfer doesn’t mean you need to leave your debt at a high APR once the promotional balance ends.
Always Pay More Than the Minimum Due
If you aren’t comfortable with the idea of a balance transfer, or it doesn’t make sense for the amount of debt you have, then you should pay more than the minimum amount due.
Paying only the minimum means most of your money is going straight to interest instead of chipping away at the principal debt.
It’s important to pay more than the minimum due to eradicate debt in a timely way and reduce the overall amount of interest you pay.
Paying down debt can often feel like an insurmountable task, but understanding how interest works on your credit card can mean saving both time and money.