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How to break the credit card debt cycle

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couple working on home finances
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Just over half of Americans have credit card debt and half of them have been in that position for at least a year, according to a Sept. 2021 Bankrate survey. Credit card debt is a persistent problem for many families, but there are some things you can do to break the cycle.

A fantastic starting point is to sign up for a 0 percent balance transfer credit card. With some of these, it’s possible to pause the interest clock for up to 21 months. That could save you hundreds or thousands of dollars in interest.

Consider someone with $5,525 in credit card debt (the national average, according to Experian). If they only make minimum payments at the average credit card interest rate (16.34 percent), they’ll be in debt for 195 months and will owe $6,247 in interest. That’s even more than they charged in the first place!

Those minimum payments start at $130 and decline along with the balance. If you take advantage of a 21-month interest-free balance transfer offer, you could make 21 equal payments of approximately $263—and completely knock out your debt in less than two years, without paying any interest. Note that most balance transfer cards charge an upfront transfer fee ranging from 3 to 5 percent, but that fee can be well worth it because of the long interest-free promotion.

Be disciplined about these offers, however

Don’t just view a 0 percent balance transfer as an excuse to kick the can down the road. You need to pay a lot more than the minimum to get ahead. Only about half of these balance transfers are paid in full by the time the clock runs out, Citi Chief Financial Officer Mark Mason said during his company’s Oct. 2021 earnings call.

After the 0 percent promotional rate expires, your interest rate could easily jump to 15 percent, 20 percent or even higher. That’s a big reason why card issuers offer these deals. They’re loss leaders that get new customers in the door. If you carry a balance over the long term, you’re a very profitable customer for the bank.

To get the most out of a balance transfer, avoid making new purchases with the card. Divide how much you owe by the number of months in your interest-free term and stick with that plan. If you do it right, a balance transfer can save you a ton of money.

Can you do a second balance transfer?

It’s possible to add another balance transfer, but try to not create any bad credit card habits. You shouldn’t view balance transfers like a shell game, simply moving money around and not making any real progress. The typical minimum payment formula only involves paying off 1 percent of your balance every month (plus interest, but that doesn’t apply if you’re using a 0 percent balance transfer card).

This is why it’s so important to pay way more than the minimum, even if you’re not being charged interest for a while. That bill will eventually come due. And even if you’re able to qualify for a second balance transfer (with another company) at the end of your term, you’ll likely face another 3 to 5 percent transfer fee. Plus, your credit score could be negatively impacted if you’re using a lot of your available credit, initiating too many hard inquiries or lowering the average age of your accounts.

One instance in which a second balance transfer might make sense is if you owed a lot of money and made substantial progress, but then ran out of time (and money) to finish the job. For example, if you started with $5,000 in credit card debt and worked hard to pay it down to $2,000 during your interest-free balance transfer period, it might make sense to transfer that remaining $2,000 to another 0 percent balance transfer card. But hopefully that will be the end of it.

If you’re not making much progress, it’s probably time to try a different strategy.

Other ways to knock out your debt

Another great tactic is to seek assistance from a reputable nonprofit credit counseling agency such as Money Management International. They can work with you and your creditors to come up with a debt payoff plan, often something like a five-year term with a 7 percent interest rate. Besides the mathematical advantages of a lower interest rate and a fixed term that’s much shorter than the minimum payment cycle, getting professional advice can be very valuable.

Note that these plans often require you to close your credit cards, which may not be ideal, but it’s a tough love approach that benefits some people. MMI’s debt management plans charge an average monthly fee of $25 and an average one-time set-up fee of $33.

Consolidating your high-cost credit card debt into a personal loan is another potentially advantageous debt reduction strategy. The do-it-yourself approach works best if you have good to excellent credit and are comfortable managing your own money. If you have a strong credit score, you may be able to qualify for a personal loan with an interest rate around 5 percent. However, the average personal loan rate is 10.28 percent and some people with lower credit scores are paying a lot more than that, so take a careful look at your specific terms before committing.

The bottom line

Whichever debt management strategy you choose, it’s essential to practice good fundamentals such as upping your income (perhaps via a side hustle), cutting back on discretionary purchases and selling possessions you no longer need. A dollar saved is a dollar earned, after all.

Paying off your credit card debt should be a top priority because these rates are already high and they’re likely headed even higher soon, since the Federal Reserve recently implemented its first interest rate hike since 2018 and projects several more later this year and beyond.

Every dollar you put toward your credit card debt represents a guaranteed, tax-free return of whatever your interest rate happens to be. There’s a good chance it’s 15 percent or more. Paying off that debt represents huge potential savings and can free up a lot of money for your other financial goals.

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Part of  Balance Transfer Basics