Zero. Zilch. That should always be your goal when it comes to debt, especially the high-interest kind that can pile up on your credit cards. And you should get to that number as fast as you can.
Why the rush?
If the Federal Reserve keeps faithful to its projections, it will raise its benchmark interest rate twice more in 2017. The first hike could come as soon as this week.
That means any credit card debt you’ve been carrying will cost even more. That’s a big deal considering Americans owe about $1 trillion in credit card debt.
So now is not the time to give your monthly statement the side eye — it’s not going away on its own.
“If your minimum payments are so large that you find yourself swimming against the stream, you could benefit greatly from a balance transfer card,” says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax.
Why Fed hikes affect your credit card
When the Fed’s rate-setting committee hikes the federal funds rate, the prime rate also rises. The prime rate, the benchmark that credit cards and home equity loans follow, makes up a portion of a credit card’s annual percentage rate, which is what you pay in interest.
So when the Fed raised interest rates a quarter of a percentage point March, your credit card rates went up, too.
Before you start paying more for your debt, it makes sense to plan a strategy to reduce what you owe as much as possible.
If you shift a high-interest card balance to a piece of plastic with 0% introductory offer, you get some breathing room to pay down your principal without adding accruing interest charges on top. Just know that not everyone will qualify.
“Locking in a 0% rate is a tremendous tailwind toward debt repayment,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “This gives you a specific window of time, with some cards as long as 21 months, where every dollar goes toward knocking down the balance.”
If your credit isn’t perfect, apply for a personal loan to help consolidate your credit card debt, especially if you can qualify for a rate that is cheaper than your credit card APR. The fixed interest rate on a personal loan can help protect you against Fed rate moves.
How a balance transfer works
Let’s say you owe $10,000 on your credit card, which charges the average variable APR of 16.49 percent. If you pay $500 a month, it will take you 24 months to pay off that debt plus the accumulated interest — an extra $1,772 on top of the original amount.
Shift that balance to a card with a lengthy 0% APR introductory period, and you could save some big bucks. If you pay that same $500 a month, you’ll be debt-free in 20 months — that’s four months sooner and without those extra interest charges.
It pays to do the math before getting a new card. When you shift a balance from one card to another, make sure to factor in the cost of the balance transfer fee, which is typically a one-time charge of 3 percent to 5 percent of the amount being transferred. Using a balance transfer calculator can help you determine which card offers the best overall savings on your debt.
Some of the best balance transfer credit cards waive the fee for making a transfer within a certain period of time. You also have to consider the length of time you’ll need to pay down your debt before the promotional period ends and the regular APR kicks in. If you don’t have a strategy to pay off the balance, there might not be any point in doing a transfer.
“Aim to get the debt paid off once and for all before that 0% offer expires,” McBride says. “Interest rates are rising, so no telling what offer you’ll get next time around, and you don’t want to have to pay another balance transfer fee to move the remaining balance to another card.”