Like many people, I have built up some credit card debt. This happened partly due to some big, unplanned expenses and admittedly some unnecessary spending. To sort this out and clear my debt, I am using a no interest balance transfer credit card. There are some dangers with these, but read on and you will see I have a solid plan to avoid temptation and pitfalls.
What is a balance transfer credit card?
To entice new customers, many banks and other financial institutions offer zero interest for a period of time on existing credit card debt transferred to a new credit card with them.
These cards typically have the following characteristics:
- The zero interest offer only applies to balances transferred when initially getting the new card. High interest rates apply to any new debt.
- The interest free period can be anywhere from 6 months to 24 months, after which high interest rates apply.
- Usually there is a transfer fee as a percentage of the debt being transferred over, often 2 to 3 percent.
- Like all credit cards, there is a minimum monthly payment requirement, often 2 percent.
- Often the inaugural annual fee on the no interest balance transfer credit card is waived.
What are the benefits of a no interest balance transfer credit card?
Used well, a no interest balance transfer credit card is similar to getting a loan at a flat rate equal to the transfer fee rate on the card, which is often 2 to 3 percent. These are pretty good terms for any loan. It is likely cheaper than the rates on a personal loan or a home loan. It should be much cheaper than the interest rate on the outgoing credit card from which the debt is being transferred.
What are the risks of a no interest balance transfer credit card?
The only reason financial institutions offer such generous terms on no interest balance transfer credit cards is because enough people end up using them for more than just clearing debt. They are banking on human nature. Once you have a credit card, they will offer rewards and increased credit. From the financial institutions perspective, they are already dealing with a customer who has built up a credit card debt, so it is a fair bet they can encourage the customer to take on more.
If you use the new credit card, the normal high-interest credit card rates apply to the new debt, which can be close to 20%. If you do not pay the minimum monthly amount, high fees can apply, the zero-interest rate can expire and the normal high credit card interest rate be applied to the entire debt. These costs can be steep, but these are risks that can be managed if you have a good plan and stick to it. It the temptation is too much, then it is worth looking at a personal loan instead.
How I am getting out of debt with a no interest balance transfer credit card
My goal is to pay the debt off in full within 18 months before the end of the zero-interest period. To avoid temptation, I have closed off my old credit card and now use a debit card instead. I keep my new credit card locked up at home. I have also revisited my budget and have been sticking to it. This way I can focus on paying off the debt on the no interest balance transfer credit card.
The most straight forward way for me to pay the debt out is to setup an automatic transfer of payments on the credit card from the bank account that I get paid into. Automatic payments make sense as it avoids the risk of missing a payment and incurring late payment fees, or having the normal high credit card interest rates kick in.
If I just pay the mandatory minimum monthly amount of 2% of the total balance I will not pay off much more than 30% of the loan in 18 months. To make sure the debt gets paid out, I have calculated the amount that I need to pay fortnightly to clear the debt before the 18 month no interest period expires and have setup an automatic payment to occur the day after I get paid. This way I will not be tempted by having the money sitting in my account. Calculating the fortnightly payment required to pay the debt out is straight forward. This is how:
Being honest with myself, I know that I can get tempted, but from experience I do well when I put systems in place. Importantly, I have set what I think is a realistic fortnightly payment amount for myself. If I didn’t think I could pay it out in the 18 months, I would have sought a longer no interest period, or I would plan to transfer to a different no interest balance transfer credit card before the end of the 18 months. With realistic goals and automatic payments I am sure I will stick to the plan. Of course, if I have a windfall, or manage to save more money I will try to pay it out within 12 months and save the annual fee.
I am enjoying not having to make interest payments already. Following this plan, I am looking forward to closing the credit card account for good once it is paid out.