Credit cards have become an integral part of our society. People use them daily to purchase all types of goods and services. Money Smart website states that collectively Australians owe around $34 billion dollars on credit cards. This equates to approximately $4,400 per credit card holder who are paying an average of $800 per year in interest on rates up to 20% per annum. That’s a whopping $6 billion dollars in interest every year!
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Would you rather have that money in your account?
Are you sick of having credit card debt hanging over your head and holding you back?
Do you feel burdened by credit card debt?
Then you need to consider a balance transfer credit card.
What is a balance transfer?
This is when you transfer the total amount on your current credit card to a new credit card that offers transfer rates for credit cards at 0%. There is normally a fixed period for the 0% rate which ranges from 6 months to 12 months depending on the card. What this means for you is that instead of paying around 17% interest you pay 0% interest on that amount for the fixed period. However, be careful because you will accrue interest on new purchases you make. Also be careful as sometimes they charge a yearly card fee that will cancel out any savings you make on not paying interest. So remember to do your sums prior to accepting an offer.
How does this help me get out of debt?
If you are currently paying 17% interest on your card even though you are paying money off, it is still accruing interest. That means only some of your payment is paying down the balance, the rest is just paying interest. Transferring to 0% card for a fixed term means for
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that fixed term you pay no interest on that balance. This means if you are putting $100 a month to pay off the card that the whole $100 comes off the balance. It makes good economic sense to pay 0% interest.
How do I work out what I need to pay?
Say you get a 0% balance transfer for a fixed period of 12 months all you simply need to do is divide your total amount owed by 12. This will give you the amount you need to pay every month in order to pay it off prior to the 0% period ending. If you truly want to be rid of your credit card debt forever then as soon as you receive your card cut it up and do not spend a cent on it.
Let’s look at a scenario
Bob and Jenny have a credit card debt of $1500 with an interest rate of 17%. They have decided that they no longer want a credit card debt and so no longer put purchases on the card. However, they don’t understand why it doesn’t seem to be reducing even though they are paying the minimum monthly payment.
The minimum payment is $22 per month. This is going to take them a whopping 241 months (20 years) to pay off this debt. They will also pay a total of $3784.06 in interest!
If they were paying $50 per month it will take them 40 months (3 years 3 months) to pay off this debt. They will pay $467.01 in interest.
They’ve decided they want this debt gone in 12 months so they divided the total owed $1500 by 12 months to work out they need to pay $125 per month. However, because interest is still accruing it would actually take them 14 months to pay off the card. By transferring over to a 0% card now, paying $125 per month, they will save $155.87 in interest.
Now wouldn’t you prefer that $3784.06 in your pocket? I’m sure I would.