Would you be interested in learning about an alternative to credit
consolidation loans that still allows you to consolidate your debts,
but at in interest rate of 0%? (Yes "zero" percent.)
Consider these facts , and then choose for yourself which option is best for you...
One of the first things that most people consider when trying to deal with credit card debt is some sort of consolidation loan. The thought being that if they could just get a new, lower interest rate loan and use the proceeds to pay off their existing debt, all would be good, or at least "better". Of course, this is only partly true.
Consolidating debt using credit card consolidation loans does nothing to actual reduce the amount of debt that you owe. It merely transfers it from one creditor to another. The real benefits come in the form of reduced interest rates and reduced monthly payments. (Keep in mind that reducing your monthly payments will likely leave you in debt for a longer time frame, so this may not be as beneficial as it first appears.)
But what if we took this concept to the next level? What if you were able (by consolidating your credit card debt) to eliminate your interest charges altogether, and pay off a large portion of your debt in a short period of time. Would this be of interest? Alright then. Here's how.
Many credit card companies offer what are called balance transfer credit cards. When you sign up for one of these credit cards you can then transfer your existing credit card debt to your new card and pay low or zero interest rates during the introductory period of the offer. And with many intro periods lasting 12 months, this gives you a full year of no interest.
During these twelve months every penny of your payments goes
directly towards paying down your debt, allowing you to put a
significant dent in what you owe. And just to emphasize how much of a
"dent" you can make, consider this. If you are currently paying 20%
interest on your credit card debt, and only making minimum payments, as
much as 90 cents of every dollar you pay goes towards interest charges.
But if you stop paying interest, that 90 cents now goes directly
towards paying down your debt. Those are some sobering numbers
wouldn't you agree?
|Aside: Actually, I should add an
"asterisk" here as these balance
transfer offers do come with a "hitch". You see, most companies will
charge a "balance transfer fee" of 3% (stay away from the cards
charging 5%) on the total amount of the balances you transfer. But even
with this fee, chances are you will still significantly
the amount of money that you have to pay the credit card company, be it
"interest" or "fees". And lowering the amount of "rent" you pay your
creditors is the true goal here.
Now, one significant difference between typical credit card consolidation loans and balance transfers is the length of time that the interest rates remain lower. And while at first blush this seems to make the balance transfer an inferior option, it can actually be a good thing. Why? Well, it forces you to try and pay down the principal of your debt as fast as you can, which of course, is what you want.
If 12 months is not a long enough time frame to pay off your balance (which is understandable), a good option is to do something I call the "balance transfer credit card shuffle". Before the 12 month intro period expires on your first balance transfer, you simply apply for a new 0% credit card, and then transfer the balance to that card. This could potentially give you up to 24 months of "interest freedom" during which time you will have paid down the majority of your debt.
What's the bottom line? Balance transfer credit cards can be a good alternative
to credit card consolidation loans. But no matter which option you
sure that you have a budget and debt reduction plan in place to ensure
that you get the most out of either choice.