Ever hear about balance transfers or receive those offers in the mail? Well, there is a great reason to take advantage of those offers if you, like 80% of Americans, live in debt.
The offers you are looking for say "0% on Balance Transfers". This means you can take debt from one card, and transfer it to this new one. Now why would you want that? The thinking behind this strategy is that the card you are currently hosting your debt on is NOT a 0% interest card. If this IS the case, that means in addition to your monthly payment to bring your debt down, you are paying interest on top. So how can we wiggle out from under this mandate? We can transfer the balance. This means, you will be saving money every month by moving the balance off the high interest card and onto the new, 0% on balance transfers card.
Additionally the 0% offers are typically for a duration of 12-24 months. This duration is different for every credit card so make sure to read the fine print regarding just how long a time you have before your 0% on balance transfers expires.
Now you're probably jumping for joy at the thought of avoiding monthly interest charges. But here is a rule of thumb to keep in mind. There is always a balance transfer fee. Its normally around 3%-5% of the balance you are transferring. And I know what you're thinking, all fees are bad! But this is not the case. Think about it. You just have to do the math. If the balance transfer fee is less that the interest your are going to pay, its a good deal.
Lets look at an example: Lets say you are hosting $10,000 on an older credit card and you're paying 25% APR (annual percentage rate). That means you're going to pay $2,500 in interest by the end of the year. That breaks down to over $200 every month! (A word to the wise: if you make interest-only payments, your debt will never decrease. So this interest payment is IN ADDITION TO your monthly payment which varies card to card) Now, lets look at the shiny new credit card with the infamous "0% on balance transfers" and do the math. We talked about how balance transfer fees are typically between 3% & 5%. So lets be conservative and work off of a 5% fee to initiate the transfer. 5% of $10,000 is only $500. So the movement of your debt from the old credit card to the new credit card will cost you $500. Now that's five hundred bucks up front but, it saves you $2,500 in yearly interest AND reduces your minimum payments to that required of the new credit card.
The biggest gift, is that if you are in debt, and the average american is in over $38,000 of it, this strategy buys you time. Time to learn what you can do to raise your score and decrease your debt. And most importantly, make your credit work in your favor!
