Nearly half of Americans will not pay off their credit card balance in full this month. We are addicted to plastic, and credit card companies continue to make outsized returns because interest rates are so high. In a recent survey, 75 percent of people with credit card debt admitted to paying an interest rate of more than 15 percent.
Not only does debt impact us financially, it also impacts our physical health and wellbeing. Countless studies prove what we already know: being in debt causes significant stress. It keeps us up at night. And stress leads to all kinds of health issues.
For people looking to escape the trap of debt, they can easily get overwhelmed by the wide range of opinions, suggestions and products aimed at helping people become debt free. Today I will look at the benefits and risks of three popular approaches: balance transfers, personal loans and Dave Ramsey’s advice to destroy every piece of plastic you have.
Balance Transfers
Credit card companies love to offer balance transfers. In the war between banks for credit card debt, they will give you a very low introductory interest rate if you move your debt from another bank. For example, Chase may offer you 0 percent for 15 months on any debt that you transfer from Citibank. Balance transfers are a lot like introductory offers that you would receive from a cable company offering an incredibly low monthly fee on cable, telephone and internet during the first year. After the first year, the price will increase.
If you play the game properly, it can be difficult to find a better deal than a balance transfer. If you have a balance of $10,000 at a 17 percent interest rate, you could easily save close to $1,000 over 24 months with a balance transfer.
Balance transfers are offered to existing customers (usually via direct mail) and new customers. The deals are almost always better for new customers. I keep a list of balance transfer offers available to new customers here.
However, the rules for balance transfers can be complex, which means there are plenty of ways you can get trapped.
A balance transfer can be a great tool if:
- You have an excellent FICO score, which usually means above 700.
- You have a manageable debt burden. Your total monthly payments (mortgage, auto, student loan and other credit bureau debt) should generally be less than 40 percent of your income.
- You need more than six months to pay off your credit card debt. Most balance transfers charge a fee. You will have to do the math, but if you can pay off your debt in a few months, a transfer usually does not make sense.
- You have the self-discipline to refrain from spending on your credit cards.
- You make your payments on time every month.
- You have a plan to transfer the balance again at the end of the promotional period, when the interest rate increases, until the debt is paid in full.
Here are the biggest risks for a balance transfer: …
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