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How to Break the Cycle of Credit Card Debt

Just over half of Americans have credit card debt and half of them have been in this position for at least a year, according to a September 2021 Bankrate survey. Credit card debt is a persistent problem for many families, but there are some things you can do to break the cycle.

A fantastic place to start is to sign up for a 0% balance transfer credit card. With some of them it is possible to suspend the interest clock for up to 21 months. This could save you hundreds or thousands of dollars in interest.

Consider someone with credit card debt of $5,525 (the national average, according to Experian). If they only make minimum payments at the average credit card interest rate (16.34%), they will be in debt for 195 months and owe $6,247 in interest. That’s even more than they charged in the first place!

These minimum payments start at $130 and decrease with the balance. If you take advantage of a 21-month interest-free balance transfer offer, you could make 21 equal payments of about $263 and completely eliminate your debt in less than two years, without paying interest. Note that most balance transfer cards charge an upfront transfer fee ranging from 3-5%, but this fee may be worth it due to the long interest-free promotion.

Be disciplined about these deals, though.

Don’t just see a 0% balance transfer as an excuse to hit the box on the road. You have to pay a lot more than the minimum to advance. Only about half of those balance transfers are paid in full when the time runs out, Mark Mason, Citi’s chief financial officer noted during his company’s October 2021 earnings call.

After the promotional rate of 0% expires, your interest rate could easily increase to 15%, 20% or even more. This is one of the main reasons why card issuers offer these offers. These are loss leaders that attract new customers. If you carry a balance for the long term, you are a very profitable customer for the bank.

To get the most out of a balance transfer, avoid making new purchases with the card. Divide the amount you owe by the number of months in your interest-free period and stick to that plan. If you do it right, a balance transfer can save you a ton of money.

Can you do a second balance transfer?

It’s possible to add another balance transfer, but try not to create bad credit card habits. You shouldn’t view balance transfers as a shell game, just moving money around and not making any real progress. The typical minimum payment formula is only to pay off 1% of your balance each month (plus interest, but this does not apply if you are using a 0% balance transfer card).

That’s why it’s so important to pay way more than the minimum, even if you won’t be charged interest for a while. This bill will eventually come due. And even if you’re able to qualify for a second balance transfer (with another company) at the end of your term, you’ll still likely face an additional 3-5% transfer fee. Additionally, your credit score could be negatively affected if you use a lot of your available credit, make too many difficult requests, or reduce the average age of your accounts.

An example where a second balance transfer might make sense is if you owed a lot of money and made substantial progress, but then ran out of time (and money) to complete the job. For example, if you started with $5,000 in credit card debt and worked hard to pay it down to $2,000 during your interest-free balance transfer period, it might be a good idea to transfer the $2,000 $ remaining on another 0% balance transfer card. But I hope it will be the end.

If you’re not making much progress, it’s probably time to try a different strategy.

Other Ways to Eliminate Your Debt

Another good tactic is to seek help from a reputable non-profit credit counseling agency, such as International financial management. They can work with you and your creditors to come up with a debt repayment plan, often something like a five-year term with a 7% interest rate. Besides the mathematical benefits of a lower interest rate and a much shorter fixed term than the minimum payment cycle, getting professional advice can be invaluable.

Note that these plans often require you to close your credit cards, which may not be ideal, but it’s a tough love approach that benefits some people. MMI debt management plans charge an average monthly fee of $25 and an average one-time setup fee of $33.

Consolidating your high-cost credit card debt into a personal loan is another potentially beneficial debt reduction strategy. The DIY approach works best if you have good to excellent credit and are comfortable managing your own money. If you have a good credit rating, you may qualify for a personal loan with an interest rate of around 5%. However, the average personal loan rate is 10.28% and some people with lower credit scores pay much more than that, so consider your specific terms carefully before committing.

The bottom line

Whichever debt management strategy you choose, practicing good fundamentals such as increasing your income (perhaps via side hustle), reducing discretionary buying, and selling assets is key. that you no longer need. A dollar saved is a dollar earned, after all.

Paying off your credit card debt should be a top priority as these rates are already high and will likely rise further soon, as the Federal Reserve recently implemented its first interest rate hike since 2018 and is planning several more. later this year and beyond.

Every dollar you spend paying off your credit card debt is a guaranteed, tax-free return, regardless of your interest rate. Chances are it’s 15% or more. Paying off this debt represents huge potential savings and can free up a lot of money for your other financial goals.