One of the tricks in the credit card industry is the balance transfer. This is, in essence, just closing one credit card and buying a new one, while moving your current balance of debt to the new card. This allows someone to easily change their credit card without having to pay off their debt completely. There are several other uses for balance transfer credit cards, including consolidating your debt.
You find yourself in a rough situation. You are knee deep in credit card debt and you can barely pay the finance charges. What are your options? One option is to transfer all of your debt onto one credit card that allows balance transfers. The benefits are very clear. First you will only owe one creditor instead of multiple companies. Furthermore, and possibly more importantly, many of these cards offer a very low or even 0% introductory APR for 12-15 months. This means that for the first year or more, you can pay off your credit card without paying finance charges.
There is the potential for huge savings here. Given an average interest rate of 18% and a total balance owed of $7500.00, this is a $1350.00 savings in the first year, or $112.50 each month! You might note that 18% APR is a fairly high, but many credit cards for people still building their credit or without perfect credit carry APRs of up to 19.75%.
Let’s imagine you have excellent credit and your APR is a miniscule 10% APR. Your will still save $750.00 in the first year and if you put this savings toward your balance, you will be well on your way to paying off your debt. If you continue paying your current credit card rates, let’s again imagine that the APR is 18%, and let’s say you put $200.00 a month toward that balance. Then, after the first year, you will still owe $6394.00. This means that of the $2400.00 you paid total, $1294.00 went toward finance charges, and $1106.00 went toward paying off your balance. At this rate you will be paying $200.00 a month for 56 months. Don’t forget, this is if you aren’t making more charges!
If you use a balance transfer with 0% APR for the first year, then all of the $2400.00 you paid will go toward the balance and it will take you only 33 months. You are saving 23 payments, or $4600.00. That is a HUGE savings. The reason is that not only will you be saving on finance charges for the first year, when the interest rate kicks back in; you will be paying it on a lower balance. A lower balance means that the APR adds less money to your balance every month.
So if you are looking to consolidate your debt and reduce the time it takes to pay off your debt, look into the different options you have with a credit card balance transfer. It is a hassle free process that has benefits that can’t be overlooked. Unless, that is, you have an extra $4600.00 to waste.
