Recommendations:
- Get a 0% APR balance transfer credit card
- Transfer high interest balances
- 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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