I thought I would take a detour this week having just celebrated the holidays and for some of us this means our credit card balances went up. Have you taken a look at the interest rates that you are currently paying? Are you concerned about saving every last penny but ignoring the fact that you are throwing away hundreds of dollars just for the luxury of not having to pay right now? Believe me, I understand the convenience of buying now and paying later, however, when you owe less than $500 on a credit card and see that it cost you almost $10 for 30ish days…that’s a lot of money over time!
Yes, I am all about maintaining active credit and using your credit cards and other forms of financing to help grow your overall credit score. Yes, in order to play the credit scoring game you must have and use credit. But No, I do not like or recommend throwing money out the window! So here is a suggestion and I repeat, only a suggestion that you can use to help you pay off the debt faster. It’s not for everyone but if it can work for you and you can work with it…you will achieve success much quicker.
Transfer Balance Cards
What is a transfer balance card? It is a credit card with a special offer to transfer balances from another card to the new card. With a transfer balance, there is usually an offer to entice you to transfer balances to them. What kind of offer? Usually, a credit card company will offer a lower rate of interest on that balance and even a ZERO percent (0% intro APR’s) offer for a designated time frame. What’s in it for them? They get you to have a higher balance with them and once your designated time frame is over, they can begin charging the higher interest rate on your entire balance.
So why would I make this recommendation? First off, you are using their money for free! Diligence is required! Research all offers or even call the credit cards that you already have to get the best deal for the longest time. Secondly, you can pay down those balances quicker by saving on the interest amount that is usually added onto your balance each month. Lastly, if you did your research well, you may find the card earns rewards in addition to saving you money!
This is a brilliant strategy for paying debt down faster. It is also a great strategy for decreasing your utilization ratio (only if it is a new card) as it will spread your balances out over more cards. The key to your success in this strategy is to recognize and properly use it as a strategy and make a plan of action to either knock out the new balance that you transferred over within the time frame of the promotion or have another card ready at the end of the promotion that you can transfer to in order to buy more time. Either way, the message is to be smart with your credit and utilize these transfer card promotions to help you gain control and to set you up right in the months to come.
This is NOT a rob Peter to pay Paul concept. Far be it…this is about using what is available to you and making it work to A) Reduce or get you out of debt quicker, B) Reduce your utilization ratio to increase your overall credit scores.
Paul has 3 credit cards with each of them having a line of credit of $1,000. That is $3,000 total extended unsecured personal credit.
Paul also owes $500 on each of those cards. Not bad, he is at a 50% utilization ratio on each of those cards and for his overall unsecured personal credit.
Paul takes out a Balance Transfer Card in the amount of $2,500 and transfers the $1,500 ($500 to each of those 3 cards). The goal is to transfer the full balance so that you are saving money on the finance charges normally added on those cards. In this example, you may be asking WHY am I recommending taking the new cards utilization rate up to 60%? Your utilization ratio is based on all of your revolving credit and so you now add up all balances available and divide that by the amount outstanding (e.g. $5,500 / $1,500 = 27%). Yay! You are still under the magic number of 30%. In addition, you have increased the number of trade lines which also helps to increase your credit scores*. The goal is to make larger payments on the new card in order to pay it off within the promotion period.
If this is a good strategy for you…do your homework!
- Research different credit card companies to see what offers are available. Check the transfer balance incentives, making sure you understand the terms (e.g. rate, time frame, interest rate after the offer, rewards)
- Contact your existing companies to see what their programs entail. Be sure you don’t create a high (over 30%) utilization ratio. If you do, ask them for a line increase.
- Make a plan that works for you and your household and commit to the plan. Check in monthly to ensure you are on track and abiding by your new rules.
- Take ACTION and DO IT!
For questions or additional resources, please contact me at Info@CreditGal.CO
*Example is based on credit scoring criteria.
Written by Kim Burger ~ Credit Gal, Master Coach and Field Trainer for Financial Education Services.
Information Gathered from **FES (Financial Education Services) and United Credit**