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Helping you Save: Consolidate Debt

Recommendations:

  1. Get a 0% APR balance transfer credit card
  2. Transfer high interest balances
  3. Don’t use this new card for other purchases

Annual Savings Potential: Depends on balance– could be $1,000 or more

Discussion According to New York Newsday, credit card interest payments were $116 billion in 2007, with another $23 billion in fees.  If you have reasonably good credit, your contribution to this amount should be about $0.  We all tend to think about the cash or travel rewards associated with a card we are considering.  However, if you are currently carrying a balance on one or more cards, not paying interest for a year will likely be worth far more than any of those other benefits.   (Use our balance transfer calculator to see how much you can save).    Try and find a card without a balance transfer fee — unfortunately most of them do at the current time.

Beware this Catch: More importantly, it can be more expensive than you think if you use your new card to make purchases during the 0% balance transfer period.  Most cards have a disclosure that says something along the lines of “Payments will apply to lower interest rates first”.    Let’s say you get a new card with an interest rate of 10% on purchases, with 0% on balance transfers.  Further, let’s assume you transfer $1,000 from another card, then rack up $1,000 in additional spending your first month.   You then make a $200 payment with your first bill.    Guess what — your card company will apply your payment to your 0% balance, and you’ll end up paying interest on the full $1,000!    As you can see, this provision can significantly reduce the benefit of the 0% APR.

There are two solutions to this dilemma.      You can try and locate a card with 0% APR on both balance transfers and purchases.   Alternately, use your new card to transfer the balances, then stick the new card in a drawer and don’t use it for any additional purchases.

 

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