Americans love revolving credit, a fact proven by the recent Federal Reserve data. The net revolving debt, or credit card debt, Americans owe stands at $1.08 trillion, with each household with a credit card carrying a revolving debt of $8,398.
While credit cards offer financial flexibility to the owners, they come with a high-interest rate, eating away your income without making a noise. According to NerdWallet, the average American household with credit card debt would’ve paid $1,162 in annual interest charges.
If you’re a part of this club, don’t worry. We’ll are guilty of slipping every now and then, but you don’t have to continue paying these excessive interest charges. We have put together a post to help you get rid of expensive credit card debt by using a balance transfer credit card.
What is a balance transfer credit card?
A balance transfer credit card allows you to transfer your existing credit card debt to a new credit account, which usually comes with a low-interest promotional period (0% or minimal-interest charges).
How can you transfer your existing credit card debt?
- Start by checking offers for balance transfer credit cards. Find out if any of your existing credit card providers are running a promotion. Alternatively, you can apply for a balance transfer promotion.
- The credit card provider will check your credit profile, existing debt, payment history, and credit score for qualification purposes. Once you qualify, you’ll receive a set credit limit up to which you can discharge/transfer your debt. Also, the low-interest period or promo period will have a timeline, so try and negotiate favorable terms.
- Once you’re approved, you have to transfer existing credit card debt to this new account. In most cases, your credit card provider will do it for you, or you can do it yourself online.
- Voila! You can start saving your credit card interest payments and instead use that money to eliminate your debt.
Pros and cons of balance transfer cards
- You can save money on interest payments.
- You can consolidate your debt and simplify your personal finances.
- You may get better terms, benefits with the new card.
- The promo period is short.
- Balance transfer cards come with high balance transfer fees.
- These schemes charge a high penalty for missed payments.
Credit card balance transfer case study
Case I: Paul has a credit card debt of $10,000, with an APR of 22%.
Case II: He received a cash balance transfer offer with promo period interest of 3% for 18 months, a transfer fee of 3%, and 19% interest after the promotional period.
|Net Interest Paid
Assumption: We assume that Paul makes minimum monthly payments in both the cases, i.e. $300 in Case I and $309 in Case II.
One of the best ways to eliminate debt is to face it instead of turning a blind eye. Start by assessing your financial situation and create a strategy that suits your financial circumstances. Always remember that you got yourself into this pit, and you are the only one responsible for climbing back up.