Getting out of credit card debt can be a long and fraustrating process. Every day, interest accumulates on the money owed and every month the bills do not seem to get much smaller. This is particularly true if you pay close to the minimum, which costs you hundreds of dollars in interest and leave you paying for purchases you made years ago.
Do you know how much credit card debt costs you? To put the matter in perspective, consider this.
A person with $5,000 of credit card debt on a card with a 14% interest rate who makes minimum payments of $100 will need 6 years and 4 months to get out of debt. In the process, they will spend over $2500 dollars on interest. Pretty scary.
Of course, many of us strive to pay more than the minimum every month. Unfortunately, doubling monthly payments to $200 still makes getting out of credit card debt a long and expensive journey that will cost nearly $950 in interest and take 2 and a half years.
How Balance Transfers Can Save You Money
A balance transfer saves you money by letting you to transfer your high interest credit card debt to a new card with a 0% interest rate that can last anywhere from 6 months to 2 years. The longer the 0% rate lasts, the more time you get to repay your debt without racking up interest charges, so clearly longer offers are better.
When you transfer balances, you are charged a small transaction fee that is typically 3%. After this fee is paid, every dollar you send in to your credit card company goes directly towards reducing your credit card debt. Without interest piling up, this can really speed up time it takes to get out of debt while potentially saving you hundreds of dollars on interest.
A person above transfer $5,000 from a card with a 14% rate to one that offered a 0% rate for 18 months, paying $100 a month would reduce debt to $3,450 in a year in a half. After the 0% rate expires, it might be possible to do another balance transfer. But even without that, continuing to pay $100 per month would help that person become debt free in five years and three months and only cost them $990 in interest. By doing a balance transfer, they save $1,500 and get out of debt a year faster.
A person who pays $200 a month and does a balance transfer can erase their debt even faster. During the 0% interest period, $5,000 of debt is reduced to a very manageable $1,550. And when the 0% rate expires, it will only take nine more months to be debt free. By doing a balance transfer, this person can reduce their debt to zero while spending a grand total of $85 on interest, a savings of more than $800.
Using Balance Transfers Correctly
Clearly, a 0% APR balance transfer credit card can really speed up the process of getting out of credit card debt. But it can be easy to make mistakes. For starters, it is important to commit to a repayment plan and stick to it. As you pay down your debt, your required payment will decrease. If you decrease your payments, you’ll extend the time it takes to get out of debt.
More importantly, a commitment to reducing debt also requires that you stop spending on your credit card and live within your means. A 0% rate won’t stop your debt from rising if you continue to rack up new charges. Be sure to stay focused on paying down your cards and strive to live within a budget until your credit card debt is eliminated.
Photo from Wikimedia Commons.