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Options for dealing with maxed-out credit cards

Balance transfer cards, snowball payment system can help tackle debt

Dear Opening Credits,
I have a few credit cards and store cards that I have pretty much maxed out. I have always paid early or on time. However, a couple of my cards have high-interest rates and my payments seem to be pointless. I sometimes try to make double payments when I can, but it seems as if I’m spending half my paychecks on my credit cards every week. My question is, would I be able to transfer multiple balances so that I can make a bigger payment once or twice a month instead of what seems like every other day? – Lisa

Dear Lisa,

It’s incredibly frustrating to make steady credit card payments, but see little difference in the actual balance. When the debts and the interest rates are high, it can take years to be in the clear if you just pay the minimum. Transferring balances to a card with no or a very low interest rate can help tremendously.

Yes, you may be able to shift the balances from multiple cards to just one. You can also pay as many times in a billing cycle as you want, as long as it adds up to be at least equal to the minimum payment.

To be eligible for a low or no-interest balance transfer credit card deal, though, you’ll have to have a credit score that’s at least in the “good” category of 700 or so. Also required is enough of an income to prove you can afford the payments.

Assuming you qualify and assuming the credit limit you are granted is high enough to absorb all your card debt, here is how it can help you get ahead. Let’s say you currently owe a combined $15,000 and the average interest rate across your cards is 20 percent:

  • The total for your minimum expected payments would be around $400.
  • $250 of the payment goes toward interest charges.
  • $150 is applied to the balance.
  • It would take 28 years to pay everything off, with a declining balance and payment.
  • The interest would add up to $23,984, assuming you never charged another penny to these cards.

Check Out: How to manage a low-credit limit card to boost credit score

Option No. 1: balance transfer

Now imagine you transferred all that debt to a credit card with a 21-month, 0 percent introductory period rate (which is what the Citi Diamond is currently offering):

  • A balance transfer fee of 3 percent would be added to each card’s balance that is transferred. For this example, we’ll lump them together as one, which would be $450, making the balance $15,450.
  • If you pay $736 a month for 21 months, you’ll  be out of debt in less than two years at no extra cost! If you can’t meet that higher payment, you may pay less, of course. However, there will be a balance remaining at the end of the introductory term and regular interest will apply. You’ll still come out ahead, but not quite so dramatically.

Option 2: Snowball method

There is another option to be out of debt in 21 months. This is called the debt snowball method. Stick with the accounts you have and stop charging entirely. Again, for a $15,000 combined debt and a 20 percent average APR:

  • Allocate $853 a month for your creditors.
  • Pay the minimum payment on all the accounts with the lowest APRs, then send what’s left over in a lump sum to the account with the highest APR.
  • Continue to do so until the highest-APR account is at zero. Sticking with the $853 payment, now reserve the bulk payment for the account with the next-highest interest rate while the rest get the minimum. Continue with this pattern until all accounts are repaid.
  • You’ll still be assessed interest, but after a few months of paying down the balances, ask your credit issuers to reduce your interest rate. With substantial and timely payments, they may agree. It never hurts to ask.

The advantage of keeping your current batch of cards is that you don’t have to qualify or shop for an account that will take on your old debts. Nor will you be charged any balance transfer fees. Although I’m a big fan of balance transfers, it’s important to know the drawbacks as well as the benefits of any financial decision.

Other alternatives

Another alternative could be to apply for a 0 percent balance transfer card and just put the balances of your highest interest cards on there, such as all your store card balances, which tend to have higher APRs. Then work out a repayment plan for that balance within that 0 percent promotional period. Knowing that you’re making a dent in your debt can provide a strong incentive to keep going.

Some people find that getting a personal loan is a good solution because all the card debts are rolled into a fixed monthly amount that is repaid over a specific period of time. However, the temptation to start using those cards again can be great, given that they are all now paid off. That’s why I recommend devising a repayment method that’s guaranteed to hardwire a rather unpleasant experience and sacrifice that will serve to remind you in the future to refrain from allowing your card debt to get out of control again.

Whichever payoff plan you follow, you’ll be in the black soon. When you are, what you were sending to your creditors will be freed up. Save at least a little of it for emergencies. You’ll feel good knowing that you always have some “just in case” cash. The rest? Have some fun. After paying off so much debt, you’ll deserve it. But whatever you do, keep your card balances at zero going forward.

Check Out: Is a signature required for a new card application?

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