Today is a new day; you are bound and determined to get heavy debt loads under control and gone for good!
Resolutions such as this one, are made on a consistent basis when you feel overwhelmed. Noticeable progress can be an entirely different matter.
You have tried the snowball method to no avail. Every time you get balances to inch downward a new expense springs forward claiming your progress. You need something new. A different way of dealing with mounting credit card debt, before late payments, cause you to fall behind and ruin your credit.
Debt reduction is not a short term problem. The $40,000 or more in credit card balances you are carrying did not emerge overnight and they won’t go away overnight either. It can be difficult to work consistently on the most well thought out plan when you do not see progress right away. All the while you are paying credit card companies thousands of dollars in interest payments, preventing you from reducing actual balances.
One of the biggest issues with credit card debt is the minimum balance due barely pays the interest. When only minimum payments are made it can take nearly 30 years to pay it off, even if the card goes unused. Speeding up the process will not only save you thousands of dollars but will also increase your success and motivation.
Transferring balances to a lower rate is one way to shorten the payoff time without increasing payments. This strategy will immediately reduce monthly payments due to the decrease in the interest rate. While debt reduction is not immediate, interest rate relief is.
Mechanics of A Balance Transfer
Credit card companies frequently offer discounts for transferring an existing balance to the new credit card. Offers range from single digits to zero percent, for up to 18 months. While the rate reduction is temporary, it can provide immediate relief while you chip away at outstanding balances. During the promotional period, all or most of each payment will reduce debt balances, instead of paying the interest.
While relief is temporary, and the process does not directly pay off debt, it sets the stage for fast debt reduction over a short period of time.
The actual process is simple: Find an offer with zero or a low introductory rate, apply for the card, and transfer existing balances within the time frame required. It is not necessary to list the balance transfer on the application because most offers allow up to 90 days to take advantage of the promotional rate.
Qualifying for Offers
Credit card companies rely on stated income and your credit score as the primary qualifications for approval. They typically do not require paperwork and decisions are auto-generated within seconds of application submission. When credit is in good shape, qualifying for a new credit card is one of the easiest debt transfer options.
Those with the highest credit scores receive the best offers. The biggest challenge to a balance transfer strategy is if you are overextended and struggling to make payments, you may not be offered high enough credit limits on the new card to make a significant impact on the debt.
Balance transfers are available on all credit cards at any time, but promotional interest rate offers are limited to new customers. However, most companies have multiple card offers and programs allowing you to get an additional card with the same lender, to capitalize on the promotional rate.
Important Factors to Understand When Choosing a Balance Transfer
Key factors which determine the value the offer include fees charged for the transfer, the promotional period, the promotional rate offered, interest rate after the promotion ends, and other account fees.
Transfer fees are typical for balance transfer offers and based on the dollar amount transferred. Fees range from zero to 5%. The charge may not sound like a lot, but a 5% transfer fee on $10,000 adds up to $500. Caps or minimum charges can impact the total cost and fee waivers may be negotiated. Even with a fee, you may still save enough to make a transfer worthwhile. Consider the interest savings each month and the length of the promotional rate, compared to any associated costs. If you are paying over $200 in interest each month and the company is offering 0% for 12 months, even a $500 fee, will save you money.
The length of the promotional period is a key factor in determining overall savings. Short promotions make it harder to justify the transfer fee. Promotions can run between 6 and 24 months. Converting a balance of $10,000, which may be charging around $150 a month in interest, to zero percent for 12 months, can see a balance reduction of around $3,000 if you maintain current payments levels.
The permanent interest rate charged, once the promotion ends, will establish the long-term costs. If the permanent rate is higher than your current rate, you may be better off only transferring what you can pay off during the promotional period.
Annual fees are becoming more frequent among new credit card offers. First-year fee waivers are common, but ongoing costs can eat up savings if carrying balances beyond the promotional period. You may cancel the card to avoid the annual fee, even if you have an outstanding balance. This strategy may damage your credit score because it will impact your utilization ratio. The account would then report a current balance but a zero credit limit.
Strategy for Using Balance Transfers to Eliminate Debt
Those with good to excellent credit may be able to qualify for balance transfers and pay off more debt over the same period. This strategy can jumpstart your progress. You may choose to eliminate a couple of low balance cards or reduce balances on the highest rate debt.
Given that most promotional offers only cover a short period, when the clock starts, you want a plan in place to reduce balances as quickly as possible.
If you are unable to transfer all debt onto the low-interest rate card, consider whether you are better off paying down the zero percent debt or making minimum payments on that debt and doubling up on higher rate balances. The long-term rate after the promotion will factor into which option will give you the biggest benefit.
Whichever strategy you choose, stop using credit to keep debt accumulation at bay and measure your progress. Adding new debt to the balance sheet will create a bigger hole.
Using a zero percent offer to lower monthly payments will limit the impact the promotion can offer concerning reduction of debt balances.
Locating Balance Transfer Offers
Credit Karma, Credit Cards.com, and Nerd Wallet each provide card offers and comparison charts to help you find an offer that may be right for your circumstances.