Credit-card debt is easy to rack up, but paying it off can be a much more formidable undertaking - in large part due to the amount of interest that accrues on credit-card balances, thanks to rates that can range upwards of 20 percent. On average, a $10,000 balance with a monthly payment of $200 will only decrease the principal, or amount you originally borrowed, by about $50 every month. A full three-quarters of your payment goes to interest charges, which means you give away roughly $150 with every remittance. After about a year and half of $200 payments (a total of $3,600), you're still left with a balance of $9,150. With such skewed figures, it's no wonder so many consumers feel trapped by debt. However, there is a way to put an end to interest and to start making real progress toward your financial freedom.
Stopping interest charges is key to making your payments work to your benefit instead of the company to which you send your monthly check - and you can leverage the company's own tactics to make it happen. Many card issuers offer zero-percent introductory rates for a certain length of time on balance transfers. This temporarily eliminates the interest you owe and stops more from accumulating, allowing you to pay off your debt faster. It also gives you a painless way to boost your payments, as the entire $200 payment will then go towards your balance. After a year and a half, that $10,000 debt would be cut to $7,000, a difference of $2,150 compared to paying your regular interest rate.
Different Cards, Different Terms
Transferring your balances can be an effective way of reducing what you owe and the amount of time it will take you to pay it off. However, not all balance transfers are created equal. For instance, the length of time you're given for interest-free payments can vary anywhere from three to 18 months. This can cut into your savings considerably, so make sure you know exactly how long you have before interest starts accruing again. You should also pay attention to any extra expenses. For example, your transferred balance could incur a fee as low as $5 or as much as 5 percent. Along with annual fees, this additional cost can reduce the overall benefits of balance transfers. Do the math to ensure you're still getting a good deal. The ideal card for this debt-elimination method has an 18-month interest-free period with no balance transfer or annual fees. This essentially means that for almost two years, every cent of every payment you make is applied directly to your principal balance. Once the grace period is over, you can transfer any remaining balance to another credit card, repeating the process until your debt is paid in full. However, it is not recommended to constantly open lines of credit as this will negatively affect your credit score.
Maximizing Your Money
Some balance-transfer credit cards offer additional incentives that can amplify your positive financial efforts. The free credit score and monitoring services provided by some issuers can help you keep track of your card balances and view the progress you make on debt elimination over time. In addition, promotions such as cash back on new purchases can put 1-5 percent of what you spend back in your pocket. However, be sure to pay off these balances in full every month so you can avoid paying interest on any new debt.
The Bottom Line
Paying off your credit-card debt is one of the most effective ways to build financial stability. By taking advantage of interest-free balance transfers and cash back on new purchases, you can put yourself ahead of the game and create a cost-effective avenue to debt-free living.
Disclaimer: The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the suitability of any Even Financial product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any information or statistical data sourced by Even Financial through hyperlinks, from third-party websites, are provided for informational purposes only. While Even Financial finds these sources to be accurate, it does not endorse or guarantee any third-party content.
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