If you are finding yourself lacking in disposable income, you’re not alone. More and more of our disposable income is going to pay for credit card debt these days. One suggestion is to use a balance transfer credit card to help get you out of debt.
According to the Congressional Joint Economic Committee, in March of 2009, the national total for revolving consumer debt (made up mostly of credit card debt) was about $950 billion. In the fourth quarter of 2008, almost 14% of our disposable income went to pay for credit card bills.
Most people seem to be paying down their credit card debt, rather than racking up new charges. For the first time in five years, consumer revolving debt went down between 2008 and 2009. If you’re working to pay off your credit card debt, you should consider a balance transfer credit card.
How It Works
You transfer a balance (in whole or part) from one credit card with a high interest rate to a new card with a lower rate. It might be a “teaser rate” – a low introductory APR followed by a higher standard rate, or it could just be a better offer of credit. Either way, many consumers look to save thousands by transferring a balance from one card to another.
It doesn’t have to be a specially designed account. Your balance transfer credit card won’t look any different from other cards in your wallet. Balance transfer information is typically included in the disclosures of any credit card offer. Usually there is a balance transfer fee of 3% – 5% and sometimes a different APR (often lower) for balance transfers versus purchases.
Let’s use an example. Jane has a $5000 debt on a credit card with a 17.99% interest rate. That means she’s paying in the neighborhood of $900 a year to maintain that debt. If she wants to get out of debt, she can pay more than the minimum each month and eventually see the principle start to dwindle.
The problem is that interest rate. Let’s say Jane’s minimum monthly payment is 2% of the balance, or $100. At that rate it will take her 93 months to pay off the debt. That’s almost eight years!
Let’s say Jane doubles that payment each month, and it only takes her 32 months to pay off the card. She will still be paying $2,913 in interest. With a balance transfer credit card at 9.90%, it will still take Jane around the same amount of time – 29 months – to pay off the debt, but she will have paid just $1,265 in interest. The balance transfer saved her $1,648.
Photo via MENE TEKEL
