Credit Card Debt Management

The holidays are over and you may be left with a hefty credit card balance as a grim reminder of all the recent frivolities. Happy New Year! For many, a new year’s resolution might entail getting out of debt. A balance transfer can be a good way to do so. Consider this from SmartMoney:

“Transferring $10,000 from a 15% APR card to one offering 2.99% APR for the life of the transfer would save you $10,829 in interest, and help you pay off your debt in half the time — all without paying more than the monthly minimum of $150.”

But before you go jumping into these enticing offers, consider whether you need the zero percent introductory rate. It will be gone in a flash, leaving you with standard APR at a minimum. Why not try the low fixed APR instead? Kiplinger’s Personal Finance has named American Express’ Blue Cash the best cash rebate card and it tops the list of balance transfer cards recommended by Banks.com.

Remember that the best way to help your financial situation is to eradicate old debt, so use these balance transfers wisely or it’s all for naught. Once your old debt is erased, revise your spending habits to include only that which you can afford. It’s a new year, new spending habits, and a new, healthier, more prosperous financial picture!

Balance transfers have their place, given the right circumstances. But balance transfers are not some mystical, magical solution to all money woes. A person still has the same amount of debt after the transfer as they did before. Money Safe blog just fielded an interesting question along these lines.

I’m trying to pay off two other credit cards and I want to … be paying off just ONE. Is that possible??? …Currently I am unemployed. I’m late on paying one of the cards. Is there anything I can do?

In this scenario, it appears that a balance transfer would be a temporary fix for the root problem - negative debt to income ratio. It is possible that the monthly payments might be slightly lower for six to 18 months after a balance transfer, during the no-interest period that is so common with such offers. However, the interest will come around again and may even climb higher than the interest rate on the two old credit cards.

Balance transfer options are tempting, particularly if you’re serious about getting out of debt and hate seeing interest charges eating up so much of your monthly payment. But until the new balance transfer card gets some age on it, your credit report will take a small hit for opening a new credit card account.

Presumably, a person would close old credit card accounts after the balance transfer to avoid using them anymore (although people don’t always do that, and instead dig themselves deeper into debt). However, by combining all your debt onto one card, you also run the risk of inching too close to your credit limit. For instance, it’s easier on your credit score to have $2,500 on each of two separate credit cards that each have a $5,000 limit rather than the entire debt of $5,000 on one credit card with a $5,000 limit and an interest-free period.

So in some cases, balance transfers aren’t all their cracked up to be. Whether it’s the right choice for you depends on your credit score, financial situation and self-discipline. If you can get approved for a balance transfer credit card, are in a financial situation to attack the debt hard during the interest-free period and have the self-discipline to do so, go for it. For those who are simply coasting along, planning to continue using their credit cards and may be unemployed as in the case above, all they’re buying is time. The interest charges will return and they’ll come back with a vengeance.

Attack the root problem first before looking at balance transfers. How will you pay down the debt? Should you get a second part-time job? Should you look for a higher-paying job or just ask for a raise? Do you need to get more education? Are you spending too much on dining out? For my family of three, dining out was a shocking $600 monthly expense at one point. Wow, that could pay off a lot of debt! Wise spending, better income and greater self-control, coupled with financial tricks like balance transfers, will treat the disease instead of just the symptom.