Guest Post by Mike Brains
OK, we agree that being in debt is not a good position to be in, and that you should do what ever you can to get out and stay out of debt. So far so good. But what if you are in debt, and not in a position to make it go away anytime soon—what options do you have?
How can credit cards help?
Using credit cards may have contributed to getting you into a tight spot in the first place—or perhaps they were just the vehicle you used to get there—but could they also prove to be a way out? Used responsibly, they can actually help.
Admittedly it isn’t very often that you hear the term ‘credit card’ and ‘save you money’ in the same sentence, but there is a way in which you can use credit cards to save you a decent amount of money in a relatively short period of time.
The method involves you applying for and being approved for at least one of the numerous 0% balance transfer credit cards currently available. Many companies in the US, UK and Canada offer these credit cards. If you can’t find any of these offers then a low APR credit card is the next best thing.
What ever interest rate your presently paying on your credit card(s), moving the balances over to a zero interest, or low interest, card can not only save you money immediately, but also give you valuable breathing room to develop and implement a strategy to ultimately pay off the balances for good. Think of it as the preverbal port in a storm.
Putting Credit Cards to Work for You, rather than Against You
So how does it work?
Let’s say you have a $2000 bank loan with an interest rate of 15% and an outstanding credit card balance of $2000 with an APR of 22%. In total you will be paying and average rate of at least 18.5% more to clear these debts than you would do if you performed a credit card balance transfer to a 0% or very low interest card…and that’s assuming you pay both balances off within a single financial year.
Of course this only works if you are awarded a starting credit limit of at least $4000 when you apply for a credit card. Saying this, even if you only get a $2000 limit you can still transfer the balance from your other credit card and save yourself the interest payments.
It would be better not to use the new credit line to pay off the bank loan in this example, since you don’t want to exchange an installment debt that will be paid off in due course with revolving debt which at least theoretically might never be paid off. The zero interest credit line should be seen as a temporary tool and not as a way to extend credit.
Using 0% credit cards responsibly
The best thing about most 0% balance transfer credit cards is that the 0% interest rate remains on the account until the balance transfer amount is completely paid off.
Unfortunately these credit cards do charge interest on new purchases and cash withdrawals though, so in order to really save money you need to refrain from using the card for anything other than the balance transfer. It is worth noting as well that some credit cards only offer the 0% interest rate for a limited period of time e.g. 12 to 18 months, and so you’ll need to shop around again at the end of the introductory offer to find another 0% card.
Again, the important thing is to use a zero interest credit card as a tool to get control of your debt and to make paying it off easier.
A radical strategy? Perhaps. But now you have an idea how a credit card can save you money and help you on the road to debt freedom. Be sure that you do a quick credit card comparison and apply for the one that suits you best.
Have you ever used a zero interest rate balance transfer credit line to payoff debt? How did it work for you? What do you see as potential pitfalls?
Related Posts:
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Surviving Debt Collection Calls
How Much Student Loan Debt is Too Much?
Is Now a Good Time to Refinance?
Why Your Credit History Matters—Even If You Aren’t Applying for a Loan
Why Paying Down Your Mortgage Is More Important Than Ever
I have saved money with 0% credit cards. I pay the minimum on them and then pay off the higher interest rate loans faster. This has helped me get my debt down to a very low level. I no longer have school loans, car loans, and I rent so I don’t have a mortgage.
However, I will point out that credit card companies can and do change their terms without warning. I usually find out my 0% card has reverted to a high interest rate when I get a surprisingly high bill. For example, Wamu gave me 18 months at 0% but then Chase took over and my deal abruptly ended.
Hi Jennifer–That’s a legitimate point. Mergers are the “X” factor in everything! But a zero rate card can be a real port in a storm for as long as it lasts. The important thing is to use it as a tool to get debt under control. These days a lot of people have had to borrow to deal with prolonged or on-and-off unemployment situations; a zero interest card could be a way to get some control over that debt.
Another thing to consider is, let’s say you get zero percent for 18 months on $10,000 in credit card debt. 12 months in there’s a merger and the zero rate disappears. If you’ve paid the credit card down to, say, $4000 when the rate jumps, you’ll still have accomplished plenty during the zero interest period. And when interest kicks in, it does so on a greatly reduced balance. Not what you were promised, but you’re in a far better position for having made the move.