"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18%."
-- Charlie Munger
Munger, business partner of Warren Buffett, knows a thing or two about money -- and he makes an important point above. Many people don't think hard about the interest rates in their life, but consider that if you're paying 18% on the credit card debt you're carrying while investing in the stock market and hoping to earn perhaps 12% annually, on average, in it, you're setting yourself up to lose.
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Some debt in life is nearly unavoidable and not necessarily a bad thing -- mortgage debt often falls in this category. But if you're carrying a lot of high-interest rate debt, such as via credit cards, then your financial health isn't very good and you might have trouble reaching certain goals, such as perhaps retiring early. One of many effective ways to pay off credit card debt is to make use of a balance-transfer credit card.
The danger of debt
First, though, let's review just why credit card debt is so bad. According to a recent WalletHub report, the average U.S. household had $8,377 in credit card debt in 2016.
Many people put off dealing with their debt problems, often choosing to just pay the minimum due on their bill each month. Here's why that's a terrible idea: Imagine that you owe $20,000 on your credit card(s) and that you're being charged a 25% interest rate. If your minimum payments are 3% of your balance, you'll be starting out paying a whopping $600 per month, meaning you'll have to come up with $150 per week. If you can't, your balance will be growing, digging you deeper in debt. What if you do make that $600 payment and all future 3% payments? Well, according to a Bankrate.com calculator, it will take more than 30 years to pay the debt off, and your total payments will exceed $63,000 -- all for a $20,000 balance owed.
You really do need to pay off all your high-interest rate debt as quickly as possible. An excellent balance-transfer card can help you with that, if you use it wisely, giving you a period of time in which to pay down your debt without any interest payments. Here are three helpful tips for using these cards.
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Tip No. 1: Read the fine print.
First, as you look into balance-transfer cards, trying to determine which one to get, read the fine print and find out what your credit limit will be with the card. You won't be able to transfer more than that limit (less the balance transfer fee, if there is one), and if you exceed the limit, you might face a fee. If you want to transfer $8,000 of debt, for example, and the card limits you to $6,000, that's good to know and might influence your decision.
Find out if there's a penalty APR, too. That's when the card company jacks your interest rate up to 25% or even 30% if you pay a bill late or commit some other transgression. Many cards don't feature them, and that's vastly preferable. If you sign up for a balance-transfer card with a penalty APR, you might lose that valuable teaser rate because of a late payment and end up worse off than when you started.
Tip No. 2: Choose your card carefully.
Balance-transfer credit cards vary in several ways. Yes, each will tempt you with an ultra-low initial interest rate -- typically 0% -- but beyond that there can be some big differences.
For starters, that 0% interest rate will be in effect for you for between six and 21 months, after which a more standard interest rate applies. That standard rate will not necessarily be a great one, either, so not only should you seek cards with a sufficiently generous teaser-rate period, but you may also need cards that charge relatively low interest rate ranges following your teaser-rate period. (Your credit score will likely influence the interest rate you're given after the 0% rate expires.)
Most balance-transfer cards will also charge a balance-transfer fee -- though some don't. The fee will typically be between about 3% and 5% of the sum you're transferring or $5 to $10 -- whichever is greater. Thus, if you're transferring $20,000 in debt and paying a 4% balance transfer fee, it will cost you $800. That's a lot, but it might be worth it -- if, for example, you were previously paying, say, 17% or more on the card.
Look into all these measures for any cards you're considering, and weigh their pros and cons carefully.
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Tip No. 3: Aim to pay off your debt within the teaser-rate period.
Finally, to make the most of your balance-transfer card, aim to pay off all your debt before the teaser rate ends. (If you don't think you can, perhaps opt for a low-interest rate card instead.) Paying off a lot of debt is easier said than done, but it can be done. Many people have successfully paid off more than $100,000 of debt.
You will probably need to spend less and/or earn more. A key way to spend less is to not use that new card. Just work on paying down the debt. If you can save small sums repeatedly, they can add up. For example, brown-bagging three lunches per week instead of buying a $10 lunch can save you more than $1,000 per year. Canceling your cable TV and switching to only streaming movies and TV shows might net you $1,500 or more per year. You might also save hundreds per year on your home insurance and car insurance just by shopping around and switching to a lower-cost insurer. Think about where your money goes, and you can probably come up with some more ways to trim or eliminate some costs.
To bring more money in, consider working overtime at your job if you can or taking on a second job for a while. If you work an extra 15 hours per week and earn $12 per hour, you're looking at an extra $9,000 per year, pre-tax. It might be exhausting, but it won't be forever. You might make a surprising amount on the side just by tutoring local kids or selling crafts online.
Go ahead and consider balance-transfer cards as a strategy if you're looking to pay off debt. But go about it sensibly, and stick to your plan as you work to get debt-free.
