Are you trying to pay off your credit card debts only to get frustrated because you are paying so much in interest every month? Ever wonder if there is a way to lower that interest? There are two ways to lower your interest rate, that you pay. In this post I will discuss the two strategies you can take to lower your interest rate. One strategy is too use a zero percent balance transfer from another credit card, that has no balance. Use the this balance transfer offer to pay off a high rate card. The second strategy is to use a debt consolidation loan to pay off your credit cards. But first I want to give you a couple of warnings before I describe how to use these strategies.
If you want to use one of these strategies to pay off your high interest credit card. We need to talk about some pitfalls, that you could fall into. First, credit card companies can offer you one of two choices. They may offer balance transfers either after opening up a new account or they can send you checks in the mail. First pitfall to avoid, when the check clears yours bank and you can use those funds, use them to only pay off a high interest credit card. Second pitfall to avoid, you need to remember when the expiration date is on that offer. Most credit card companies will offer a 12 month or an 18 month balance transfer offer, so that debt needs to be paid off or moved to another credit card by the offer expiration date to keep from paying interest.
This next pitfall can happen to someone using balance transfer offers or a debt consolidation loan to lower their interest. It is moving your debt to a zero interest credit card or using a debt consolidation loan and then thinking, oh I can use the credit card again. No you can’t. You will never get out of debt by moving the debt and then go out and spend money on the credit cards again. Please, Please, Please, if you are not willing to stop using credit cards all together or pay off the balance each month, do not use balance transfer offers or a consolidation loan. Because you will only end up making matters worse for you by getting deeper into debt.
First, we will work on the balance transfer offer. Let’s say you have credit card debt of $10,000 and the interest rate you pay on that card is 21% and you minimum payment is $200, but lets say you have $500 a month to pay on your debt. You will be out of debt in 25 months and you would have paid $12,416 to the credit card company with $2,416 of that being interest according to the credit card calculator on Bankrate.com. That’s not bad. But, let’s look at the balance transfer offer method. Say you can get a balance transfer offer from a credit card company for zero percent for 12 months, you put the same $10,000 on that card at zero percent with a three percent balance transfer fee and you still pay the same $500 a month. You will be debt free of the $10,000 in 21 months and you will only pay around $10,429 in to the credit card company with $429 in balance transfer fees. You will have saved around $1,987, I want to show you how much money you could have if you invested that $1,987. According to investor.gov, if you put that $1,987 into a mutual fund earning 10% a year on average and left it in their for 30 years, you would have around $34,671!
Next we’ll discuss the consolidation loan. A consolidation loan is a loan you take out to pay off all your credit cards. You do want to be careful because sometimes these loans charge fees and sometimes they can charge you more interest than a credit card, so be on the lookout for these two items. Starting with our hypothetically situation of $10,000 in debt. Say you can get a consolidation loan for two years at 7% interest. If this loan of $10,000 has a monthly payment of $447 a month. At the end of the loan, you will have paid $10,745 with $745 going to interest. But if you would pay $500 a month to your consolidation loan you would have pay back $10,663 with $663 going to interest.
You have a couple of great ways to help you pay off your debt and avoid paying 21% interest on your credit cards. But I don’t believe there is a one size fits all solution. Some people may be able to just use balance transfers and some may have to get a consolidation loan. Then some may be able to take advantage of both. Just please remember the pitfalls I mentioned at the beginning of this post. If you would like more information on consolidation loans, check out this great resource: The Best Debt Consolidation Loans over at reviews.com