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How to use a low interest balance transfer credit card to effectively pay down your debt

Over 40% of consumers who take advantage of a balance transfer credit cards do not utilize them correctly to pay off debt and get low or no interest expense during the introductory period, a new study shows.

  • It is important to have a plan with a goal of paying off debt, and not just use this as an opportunity to enable yourself to just add more credit card debt.

People that carrying burdensome credit card debt knows how those zero or low interest rate balance transfer options can provide relief when you are being crushed by high interest credit card debt. If you approach these types of opportunities correctly, they can help you pay down your debt much faster and reduce how much you pay in interest.
Unfortunately, more than 40% of consumers who take advantage of these deals do not end up paying off or significantly reducing their credit card debt during the zero or low interest rate period, according to a study from The study showed that depending on how much more than the monthly minimum you pay during that introductory time, you could end up making little headway in paying down your debt.

To get the biggest bang out of the balance-transfer card, you must pay more than the minimum, or you will not take be able to take full advantage of this opportunity. Eventually the introductory offer will expire, and you will be back to paying high interest rates on credit card debt.

Consumer credit card debt stands at around $974 billion, according to WalletHub. The average interest rate across all cards is around 17%, although it can reach as much as 30% on some credit cards. This makes the balance transfer offer a very seductive offer if you have large credit card balances. Before you assume a balance transfer card will be the answer to your debt troubles. It is worthwhile to develop a plan on how to make sure the move will help reduce your overall debt, and not just move it from one credit card to another. Make sure you are not using the balance transfer card to provide you with temporary cash flow relief, but eventually set you up to have additional credit debt down the road.

Let’s use an example and pretend you have a $10,000 balance on a card that comes with an interest rate of 20%. You transfer this balance to a balance transfer card with a zero percentage for one year, with minimum monthly payments of $150. Also assume that the deal comes with a transfer fee of 3% percent, or $300, and that whatever balance remains at the end of the introductory period will be subject to the standard interest rate at that time. You start off owing your new creditor $10,300. If you pay the $150 monthly minimum, your balance after 12 monthly payments would be $8,500. Say the interest rate on it is then 17%. If you continue paying $150 monthly, it would take you more than 21 years to pay off that remaining balance. You would also pay more than $28,000 in interest.

However, if your goal is to pay off the full $10,300 during that one-year introductory period, you would need to make payments of $859 monthly. That amount is only $67 per month less than the $926 you would have needed to pay off that $10,000 in one year if you had left it on the 20% card (although that amount includes about $1,100 in interest).

If your goal is to pay down credit card debt as quickly and cheaply as possible, you are doing yourself a disservice if you only make the minimum monthly payment. To stay on track toward getting that debt paid off, figure out how much you realistically can pay each month. Having a plan to tackle the remaining balance after the introductory-rate period can also help.

Of course, you do yourself no favors if you continue racking up additional credit card balances on other cards. You would be defeating the purpose of trying to achieve your goal of reducing debt. Think of a balance-transfer card as a test of your discipline. You can also run into unexpected tailwinds if you pile on another balance transfer on that card before wiping out the first. Or if you make new charges on the card that are subject to interest.

Some consumers also end up transferring unpaid balances to another zero-percent or low-rate offer, which can be a good strategy for keeping interest payments to a minimum. Just keep in mind there is no guarantee that you will be able to get another one a year or more down the road.

If you are looking for a Financial Consultant that can work with you to develop a strong strategy for next year - contact Stephen Westurn (214.240.0701) or for a complimentary session.

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