The Good and Bad of Balance Transfers
Credit card debt is out of control. One of the main goals of credit card holders is to…Get Out of Debt!
Debt Consolidation
There are several ways to get rid of debt, one of which is debt consolidation. You would basically consolidate some or all debt into one loan or another financial vehicle to reduce or eliminate the debt. This can be done via a debt consolidation company, a consumer loan or transferring balances to one or more credit cards.
The Balance Transfer
With so many options, you should be able to reduce your debt sooner than you think. The Balance Transfer is the method that I used successfully.
One drawback is the balance transfer fee but the banks still have to make money somehow. They will be losing the high-interest rates that you are trying to avoid with these balance transfers. The trick is to get a 0% interest offer. Many offers include a 3% – 5% fee. This is not too bad considering you could still be paying upwards of 25% in interest charges over a longer time frame.
A trick that credit card companies use on promotional offers is to have two enticing balance transfer offers. A typical offer is 0% interest for 12 months with a balance transfer fee. Then the other offer can be around 1.99% interest also with a balance transfer fee and a longer term to repay, like 18 months. From my experience, the 0% interest is a better choice if you can complete the promotion within the allotted timeframe.
If at all possible, you must increase your credit card payments. Avoid only paying the minimum at all costs. The credit card companies now are required to show on your monthly statement, how long it will take to pay off the balance if you only pay the minimum. That long term payment should be incentive enough. But, actually seeing how much interest you will be paying over that long period is the killer.
Your number one priority is to not run up the credit cards again unless you can pay off the balance in full every month. That means your purchases must be
One very important piece of advice is to not use the credit card that you have transferred the balances to. If you do, the new balance from the purchases will still incur interest which defeats the purpose of the balance transfer.
Please, please read the fine print. The interest rate will go back up after the promotional balance transfer period.
OK, so you have very high balances on your credit cards…how will this help you if you only have 12 – 18 months to pay them off. Well, you would transfer the remaining balance to another one of your credit cards or apply for new ones. This is a rinse and repeat method until the debt is gone.
Depending on your financial situation this may not be as easy as it sounds. Trust me, it is not so easy until you start making headway and see the balances going down. Then you will have extra money to apply to the remaining credit cards with the highest interest rates. There is a method to the madness…
Discipline, Determination and Organization
I know, it is very confusing. That is why discipline, determination, and organization is needed to pull this off. I used a debt reduction excel program and maintained it every month. Let me tell you when you see the balances going down, it will all be worth it. Visual tools like the spreadsheet helped me stay focused on my Debt Freedom goal.
Remember, the goal is to reduce your debt and therefore the interest payments. So, if you take the offer that still has interest tacked on, the overall amount being paid will still amount to more. But it will still be less than paying your current interest rate.
Here is an example: You currently have a credit card with a $3000 balance. Let’s use a balance transfer fee of 3% for 18 months with 0% interest on the balance. So, $3000 X .03 = $90, a flat fee. This may seem like a lot but the current interest you pay will cost much more than the fee. Or with no balance transfer, you will pay $3000 x 15% (example: current rate) with a $90 monthly payment will cost you $906 in interest and take 44 months to pay off the $3000 in full. Try to pay the highest amount you can afford for 18 months. If you are able to pay $166.67, the $3000 will be paid in full within 18 months, if you utilize the 0% balance transfer. You just saved approximately $816 in interest payments!!! ($906 interest – $90 fee = $816)
Here is a Credit Card Calculator to use at Creditcards.com….Play around with the numbers to see how long it will take to pay off your debt and how much interest you will have to pay.
The good thing is that you can usually keep transferring balances (remember to check the terms of your agreement). So, before the attractive introductory rate runs out, find another card that offers a similar rate and transfer your balance to that card.
Or better yet, use one of the cards that you just paid off so that you are not adding too many new credit cards to your batch. This will limit your cards with available credit to use. At this point, you should have one or more cards with a zero balance. It can be really tempting to go down the same route and charge them up because you will now have credit cards that have no balance on them. Whatever it takes, you must avoid that temptation!
Very important point…you can not transfer balances back to the same credit card that you transferred the balance from.
After a few cycles of transfers, it might end up back on the card as a transfer and that would be ok. But, hopefully, you would have paid it off in full by that time.
No More Debt
Is the Balance Transfer Right For You
The moral of the Balance Transfer opportunity is to focus on Debt Freedom. As outlined, this is no easy feat but it is absolutely doable. So is it right for you? You must make that
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