In 2017, Americans broke previous debt records by accumulating over $1.021 trillion in credit card debt, surpassing the 2008 record credit card debt load that preceded the Great Recession. Total debt load has also hit a new peak, at $12.73 trillion as of March 2017. Consumers are drowning in debt, but there's an easy way to get and keep your head above these murky waters.
Credit card debt is the worst kind
There is good debt, and there's bad debt. And then there's credit card debt, which is in a class of its own. Credit cards are uniquely dangerous for two reasons. First, the interest rates: despite the current low overall interest rate environment, average credit card interest rates hover around 16.15% as of October 2017. Paying off debt that's charging you such a high interest rate is extremely difficult, because unless you make substantial payments on a regular basis, your debt is likely to grow rather than shrink over time. Second, credit cards are extremely easy to use, making impulse purchases a constant temptation. Getting a mortgage or a car loan requires considerable time and effort, but accumulating credit card debt is a simple as running the card through a reader at the checkout or entering your card number into a website.
Balance transfers are the cure
If you've got way more credit card debt than you can handle, consider using balance transfers to manage your debt load. A balance transfer allows you to move your debt from one card to another. On the face of it, that doesn't sound particularly helpful, but the nice thing about balance transfers is that they usually come with a promotional interest rate offer. For example, some balance transfers will give you low or even no interest on the balance for a three month or six month period. Such an offer gives you a chance to pay down your debt without having interest charges to work against you.
For example, let's say that you have $5,000 in credit card debt on a card that's charging you a 15% APR (annual percentage rate). If you take advantage of a balance transfer offer that gives you six months at no interest, and pay $500 per month on that debt, then at the end of the six months you'll have just $2,000 left of debt. But if you leave the debt on your current card at 15% interest and pay $500 per month, then after six months you'll have a $2,292 balance, not $2,000. This balance transfer will have saved you $292 -- leaving you more money to get rid of the remaining balance.
Note that most credit cards will charge you a balance transfer fee in the neighborhood of 3% to 5% of the amount you choose to transfer. Some will waive this fee, but typically charge interest during the balance transfer period instead. Some cards offer both a zero-interest rate period and no balance transfer fee, but it can take excellent credit to qualify for such a card.
How to use balance transfers
Like many financial tools, balance transfers aren't much good unless you use them correctly. If you accept a balance transfer offer but don't make substantial payments during the period of reduced interest, you won't do yourself a bit of good.
The most effective way to use balance transfers is to use them to dispose of your highest interest rate debt. The higher the initial interest rate on your balance, the more effective a balance transfer offer will be. For example, let's say you have three different credit cards with high balances on them: one at 20% interest, one at 18% and one at 14%. If you have a lot of debt spread over those three cards, you probably won't be able to dump all of it into a single balance transfer offer. Instead, focus on that 20% debt and get it under a good balance transfer offer. Then pay as much as you can manage on the transferred balance while making minimum payments on your other cards. If the offer expires before you've paid off the entire balance, find another balance transfer offer, use it on whatever is now your highest interest rate balance, and repeat the process.
One benefit of the balance transfer two-step is that you'll likely see a significant increase your credit score as you proceed. That's because this process helps your credit in two ways: it reduces your balances, meaning that your credit utilization percentage will improve, and it helps you stay on time with your payments, improving your payment history. And the better your credit score gets, the more balance transfer offers you'll receive, which will make it easier and easier to get rid of your remaining debt.
How to get balance transfer offers
If your credit score is fairly good, you won't have any trouble at all getting good balance transfer offers. If your score's on the low side, you'll probably need to call your credit card providers (assuming you have available balances on some of your cards) and ask them to make you an offer. Another option, especially if all your cards are maxed out, is to open a new credit card and transfer your debt over to that. New cards often automatically come with a low-interest period that you can use to pay down your existing debt. Consumers with really low credit scores may need to resort to a secured credit card, which requires you to send the company a deposit in exchange for your new card.
Going through the balance transfer process and juggling all those different credit cards may seem like a hassle, but the time you put in tracking and using those offers will be richly paid off in reduced interest rates. And as you get your debt paid down, the whole thing will get much easier because you'll have more and more available income to dedicate to repayment. It may take months or even years, but if you stick with it you'll be rewarded with no credit card debt and a much higher credit score.
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