What’s the worst thing about credit card debt? High interest rates? High balances? Never-ending monthly payments?
When I had credit card debt, what concerned me the most was feeling like it would never get paid off. Each month I paid more than the minimum, but the balance never seemed to go down. I simply couldn’t pay enough extra to make a dent in the total balance.
What’s worse, I was a personal banker at the time. Yes, the job that should have taught me the most about personal finance was the job I had when I first entered into credit card debt (thanks to a mixture of low pay, high student loan payments and lack of budgeting). I decided to take action early on though; and my opinion at the time was that an installment loan would be the best way to pay off my credit card debt.
The main draw of an installment loan was knowing exactly when the debt would be paid off. I didn’t care if the interest rate was higher than a balance transfer would be. What I really wanted was to know — without a doubt — that there would be an end date to the debt.
Unfortunately, I allowed myself to be influenced by my friends instead. “Get a balance transfer!” they said. “Pay zero percent interest and you’ll be paid off even faster!” I listened to their advice against my better judgement, and I ended up in debt much longer than the three-year plan I would have been on with an installment loan. How?
Simply put, the balance transfer didn’t change my habits. The appeal of the installment loan was having a fixed payment that I could afford and a fixed payoff date. There would be no need to change my already tight budget in order to stick to the plan. Whereas the only way the balance transfer could have worked for me would have been if I could pay significantly more each month in order to get the balance down by the time the zero percent interest rate expired. Without a higher earning job and improved budgeting skills, that simply didn’t happen.
Instead of realizing that I couldn’t afford to pay more each month, I blindly entered into the balance transfer, chasing after that zero percent interest rate. And I bet I’m not alone in this. In the right circumstances, a balance transfer can be the key to paying off credit card debt. In the wrong circumstances, well … you could end up in debt for years to come. So take these steps before you decide on a balance transfer.
Read the Fine Print of a Balance Transfer Offer
The idea behind a balance transfer is to take advantage of low or no interest in order to pay your debt off faster. But if it worked that way every time, would banks continue to offer them so freely? The truth is, low or no interest alone isn’t enough to pay your credit card off faster and balance transfers don’t address the core issue of what caused the debt in the first place. Plus, some cards charge you the new (higher) interest rate retroactively on the remaining balance when the introductory rate expires causing a huge spike in the balance that you might not expect.
Do the Math
Can you feasibly pay off the debt by the time the introductory rate expires? How much would you need to pay each month to do it? If you can afford the higher payment, you might want to go for it. If you can’t, you might want to reconsider (unless you’re confident you can take on a new balance transfer when the rate expires to cover the remaining debt).
If you don’t think you can pay off a balance transfer before it expires, you might also want to consider a peer-to-peer loan instead so you can get a lower interest rate and a clear payoff date. Then cut up those credit cards and create a plan to build better financial habits. At the end of the day, a debt payoff plan must be realistic and specifically suited to your situation to work. There’s no one size fits all. Find the right plan for you and you’ll be sure to reach success!
Shannon McNay is a member of the DailyWorth Connect program. Read more about the program here.