Zero Interest Credit Cards

How Do They Fit Into Your Debt Reduction Plan?

Zero interest credit cards are most effective if they are used strategically within a "bigger picture" debt elimination plan. Without a plan, they are reduced to nothing more than a temporary "band-aid" at best, and the beginning of even greater debt problems at worst.

I am going to make an assumption here. And that assumption is that people who are interested in 0% credit cards, are typically people who carry a balance on their cards. Why is that? Well, consider this. If you religiously pay off your credit card balance each month, do you really care what the interest rate on your card is? Sure, there might be the odd time where you are a "bit short" one month and have to carry a small balance. But keep in mind that 0% interest rates on credit cards are only a temporary thing, lasting 6 - 12 months. So if you don't carry a balance over that introductory period they are of no benefit to you.

If, on the other hand, you are carry a balance on your credit card(s) right now, and paying 18% to 29% interest rates, zero interest credit cards are a big attraction. Here's how to get the most out of their use.

Getting The Most Out Of Zero Interest Credit Cards

The first thing you need to do is ask yourself this tough question...

Why am I in credit card debt?

You would be surprised to know that many people don't even know how they got into their debt problems in the first place. Oh sure, they know they "spent too much" but that is about as detailed as they can get. If this describes your situation, switching to zero interest credit cards will only temporarily plug one hole in your sinking ship. You need to figure out where all the holes in your ship are first. You accomplish this by doing a thorough analysis of your cash flow situation and then preparing a detailed budget that you follow religiously. Assess all of your income sources (which is the easy part for most people) and then all of your expenses (which unfortunately always seem to outnumber the income sources).

Once your budget is in place, you should have a clear understanding of exactly how much you can put towards your credit card debt each month. And part of the goal of preparing a budget is to plug up some of those "money leaks" in your ship so that you can increase the amount of money that you put towards your debt each month.

The goal is to come up with a plan to erase your credit card debt in 36 - 60 months, which is an achievable goal if you are using zero interest credit cards. To figure out what you need to pay each month to reach your goal, simply divide your debt by 36 (months). If you have $10,000 in credit card debt, you need to pay $278 per month for 36 months in order to erase that debt. With a $10,000 balance on your cards right now, chances are you are making at least $200 per month in minimum payments anyway, with no relief in site. By switching to zero interest credit cards, and finding an extra $78 per month through budgeting, being debt free in 36 months is not out of the question.

Now, if you already do know exactly how you got into credit card debt (reduction in income, sudden financial emergency that you needed to take a cash advance to pay for, etc.) then perhaps you have less answers to find, but nonetheless, preparing a detailed budget and financial road map will certainly not hurt you. (Everyone should have a budget!) Other than that, the same tactics as I described above will work for you as well. The key being the act of making a plan to get yourself out of debt in 36 to 60 months, depending on what you can afford to pay each month.

Zero Interest Credit Cards - Things To Be Aware Of

The first thing to realize, and this harkens back to our "budget" and our "plan" is that you can only do the "0 interest credit card shuffle" so many times before the music stops and you run out of chairs (I mean credit cards). That is why it's important to make a 36 to 60 month plan, with 36 months being the target.

Next, watch out for, or at least be aware of the fact that many, if not most of the zero interest credit cards on the market today charge balance transfer fees. In other words, for every dollar that you transfer, they charge you a percentage fee and add it to the balance owed. In most cases it's 3%, but it can be higher if your credit is not ship-shape. Therefore, on a $5,000 balance transfer, with a 3% transfer fee, your "new" balance would become $5,150.

Lastly, beware of potentially higher minimum payments on your 0% credit cards. Understand that if the majority of the balance on your new interest free credit card is made up of balance transfers, (as opposed to new purchases and other charges) the monthly minimum you may be required to pay could be as high as 4% of the outstanding balance. Again, make sure you realize this and that you determine ahead of time that paying 4% of the current balance of your credit card debts is feasible.

I'll say it one last time.

Budget. Budget. Budget.

Of course, if you can afford to pay 4% of your current balance, and you stick with that amount for 25 months, voilà, you are out of debt! Congratulations. On the other hand, if you get caught off guard by the higher minimum payment, and this forces you to miss a payment or even not meet the minimum payment, there is a good chance that your new zero interest credit card will be switched immediately to the default rate which can be as high as 29.99% in some cases.

Just be aware of these things and work them into your plan before you consider zero interest credit cards and you should be fine.