This is a guest post from Nickel, who writes about personal finance over at FiveCentNickel. And since that, combined with his four kids, don’t keep him sufficiently busy, he has recently launched yet another site, this time focused more narrowly on credit cards.
You’ve heard it before: you can’t borrow your way out of debt. But that doesn’t mean that you can’t use credit cards to your advantage when digging yourself out of a financial hole. The trick here is to apply for and use balance transfers that reduce your interest rate — ideally all of the way to zero.
How it works
Start by applying for one of the many 0% credit card offers that are out there floating around. These cards come with promo periods as long as 12-15 months, so you can save a ton of interest.
Once approved, simply transfer your higher rate debts to your new, lower rate card. Next, get serious about paying down your balance before the promo period expires. There are a number of options here — just pick whichever one works for you and get rolling. And don’t worry too much if you can’t get your balance completely paid off before the promo period ends — you can always rotate your debt to another card when the promo period runs out.
One nice thing about this approach is that it’s not limited to credit card debt. Because many card issuers provide balance transfer checks, you can use this strategy to consolidate debts from a variety of sources, including car loans, home equity loans, and student loans.
While they can save you a ton, 0% balance transfers are not without their pitfalls. For example, most cards charge a transfer fee that can eat into your savings. While the fees are often capped at $50-$75, sometimes they’re not capped, so be careful. It’s also important to stop adding to your debts when using this strategy. Since most credit card issuers will apply your payments to the 0% portion of your balance, any new charges will incur finance charges until you get your balance down to zero.
So enter into this strategy with caution and consideration of your own habits. If you can’t control your credit card spending, then you’ll want to work on that problem before tackling your other debts.
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