USING CREDIT TO PAY OFF DEBT
Posted on: Dec. 26, 2016 in Credit, Debt, Credit Score

If your debt has grown to where you cannot pay it off over the course of several months, you may end up getting slammed by interest. While paying off your cards right away is the best way to avoid paying interest, sometimes life gets in the way and this isn’t possible. When that happens, you may want to consider using a balance transfer option to save money. Moving money from a high interest rate card to a low interest rate one means that you’ll save money and can pay off the card faster.

In order to transfer a credit card balance, you must have available credit somewhere. If you have one card paid off and a balance on the other, look to the empty card to see if you qualify for a balance transfer offer. If you don’t have enough existing credit available, you may consider applying for a new card.

There are pros and cons to opening a new credit card. First, when banks look to your credit report to consider your application, this can bring down your score slightly for a period. However, if you are approved for a new line of credit, your overall debt-to-available-credit ratio can improve, causing your score to go up. Either way, if this helps you eliminate debt, you may find that any temporary hits to your credit score are worth it.

There are a few things to keep in mind when looking for a balance transfer offer. It’s important to read the fine print and call the lender with any questions you may have so that you fully understand the cardholder agreement. Here are a few key items:

  • Introductory interest rate: To entice you into moving your balance, credit card companies may offer a lower interest rate for a period, possibly even 0%. Not paying interest on the balance you transfer (presumably from a high interest rate card) is what makes this an attractive option.
  • Ongoing Annual Percentage Rate (APR): Pay attention to the amount the company will charge you if you fail to pay off the balance before the introductory rate expires. If it’s worse than what you had before, you may want to reconsider.
  • Balance transfer fee: This is often a fixed dollar amount or a percentage of the amount you transfer. You may have to pay this amount in full on your first monthly bill. You’ll need to know when and how this amount is due so you can plan accordingly. If the fee is too high, a balance transfer may not be the best move.
  • Minimum monthly payment: This is usually a percentage of the total outstanding balance, plus any other fees. If the minimum due is more than your old card, or more than you can handle, don’t open the new card.

Once you decide to move ahead with a balance transfer, avoid using your cards to charge additional items. You may have new credit available, but continuing to use more credit than you can afford will only make you deeper in debt. Also, if you fail to make a payment on time, your introductory rate may no longer be available. It’s important to use this time to really tackle the debt, pay on time, and set yourself up to be free of the balance before the introductory offer expires.

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