Tag Archives: interest rates

The Ups and Downs of Doing a Balance Transfer

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So you’ve gotten yourself into some credit card debt and you’re feeling a little overwhelmed about how to get out of it. It seems like every time you look at your balance, it’s gone up way more than you expected because of those pesky interest charges, and you’re beginning to wonder whether you’ll ever be able to get it back to zero.

But then, a beacon of hope arrives in the mail. Your bank is telling you that you can put a stop to those interest charges—at least for a little while—by putting all of that debt somewhere else. Or, maybe a new bank is telling you to bring your debt over to them by opening an entirely new account. Whether or not you should take advantage of one of those balance transfer offers depends upon the current state of your credit and the merits of the offer itself.

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If you’re interested in opening a new card, one of the negative sides is that, even though the direct mail letter may make it seem like you can basically call them and the card will appear in your hand, you still have to apply for the new line of credit. Because of that, the process can take time and you risk being denied. Daily Finance advises against applying for several lines of credit at a time because it will work against your credit score, decreasing your chances of actually getting a new credit line. However, if you are approved, your credit score could increase because your credit utilization rate (or your credit-to-debt ratio) will improve.

Using an existing line of credit may be a great way to consolidate your debt as well, especially if you already opened a new line of credit in order to complete a balance transfer in the past. CreditCards.com shares the important reminder that you may not be able to open a new line of credit because creditors could see you as a risk if you continue to carry a balance even after getting new credit. Being seen as a risk would make it harder for you to get different types of credit, such as loans for cars or a home.

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Regardless of whether you need to open a new account or are considering using an existing line of credit, make sure to read the fine print to find out how much it will cost. Every balance transfer will have a fee associated with it, regardless of the bank or the newness of your account, but some balance transfer offers have lower fees than others. Another consideration is the length of the zero or low interest rate promotion: some give you 18 months to pay off the amount, while others give you 24 months. USA Today makes an important point for debtors: creditors have no legal obligation to remind you of the end of your promotional rate, so it’s important to be diligent about paying off the entire amount in time or be prepared for the appearance of interest charges when the promotional rate expires.

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In addition to enjoying a lower interest rate on your debt, you’ll have the added benefit of easier, streamlined payments. If you have found yourself confused by due dates and bill cycle closing dates, this may be a very real perk to help you get back on top of your debt. The phrase “consolidating debt” sounds a lot fancier than it really is: all it means is that you put all of your debt in the same account, typically using a method like a balance transfer. But, keep in mind that many balance transfer offers have a limit on the amount of debts you can transfer.

If you do a balance transfer, be careful not to forget about the debt or only pay the minimum just because you are enjoying a zero percent interest promotion. Make regular payments and remember, if you have zero debt, you won’t have to worry about finding a card with zero interest!

Ways to Get Out of Debt

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“We got so far out of debt, we got lost!”

Having a credit card or taking a loan is a commitment that requires a lot of self-control. It is easy to spend borrowed money. It is easy to pay only the minimum payment due. It’s easy to say “yes” to something you don’t have to worry about until the future. But when the future arrives and you’re still in the hole, what can you do?

Getting out of debt requires a coherent and realistic plan that might start with a little prioritizing. Credit.com recommends making a detailed list of all of your debts, a list that includes the total balance, interest rates, the minimum monthly payment, and the three- or five-year pay-off amount that is likely available on your statement. That way, you can compare each debt and evaluate which one is the most pressing based on the interest rate or amount owed.

Consumer expert and blogger Clark Howard advises that in addition to organizing the debt you owe, you should commit to not accruing new debt if possible. Focus on the debt you currently owe rather than looking for opportunities to get new things that you will have to finance. When you organize your debt, list the smallest first and the largest last. Once you tackle the first, you will gain confidence that you can also tackle what remains, and you will see a clearer picture of when you can be debt-free.

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“If we jump high enough, debt can’t reach us!”

One way to avoid having to open new credit lines is to commit to spending cash instead of thinking of your money in terms of credit. Time magazine’s Family Finance writer Kara Brandeisky explains that people who pay in cash are more likely to “feel the pain associated with spending real money,” citing a study that showed consumers are less likely to make luxury impulse buys with credit cards.

Another key part of making a financial plan is to be sure to pay more than the minimum balance each time. Paying the minimum only requires you pay a very small portion of your debt—and then leaves the rest of it in your account to accrue interest. One way to avoid paying a lot of interest is to utilize available balance transfers—most of which offer a promotional period with low or zero percent interest.

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“I got a retweet!”

Make a plan with deadlines and set amounts that you are to pay off, and be willing to adjust that plan when necessary. Track your behavior using a chart or taking notes about whether you really did what you said you were going to do, and be honest with yourself. You may want to create a plan, then schedule time to reassess it every month in the beginning, slowing down to every quarter as you progress. That way, you’ll be sure you’re on the right track and you’ll have the added reward of seeing your debt totals go down.

Clark Howard also advised debtors to use any “excess” cash against their debt. Excess or unexpected cash may come from a higher tax return than expected, a rebate, sales of items on eBay, or even selling your diamonds with us. If you have that cash, prevent the debt you already owe from adding up by putting it toward it. You’ll never miss it!

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“Yes!! …Also, I’m excited for pumpkin spice lattes.”

Liberating yourself from debt is an achievable goal if you are willing to change the way you think about money and the way you live your life. If you make a pact with yourself that you are going to pay off your debt, then uphold that pact, you can knock the debt train right off the tracks and get things moving in a more positive direction. Eighteen percent of people surveyed by CreditCards.com said they expect to never pay off their debts. But that pessimistic attitude doesn’t have to be yours if you plan properly and act according to plan. So chop up that plastic and get out of the black!

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“Debt doesn’t bother me…because I’m really a super hero.”