1 Simple Way to Pay Down Debt Faster
Credit card holders that are serious about paying off high-interest credit card debt can take a number of steps to reduce their balances faster, including better budgeting and saving that goes beyond just dipping their toes in the water.
In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton talk about one credit card strategy that may make sense for cardholders who want to pay off their credit card debts faster.
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Michael Douglass: All right, so, Nathan, let's talk about paying down debt faster. One of the key ways that you would argue that we can do that effectively is by using a balance-transfer credit card. Of course, first off, what is a balance-transfer credit card?
Nathan Hamilton: Yeah, we'll get down to the Balance Transfer 101, essentially. A balance-transfer credit card is taking a balance from a card that's earning, say, a high interest rate to a new credit card offer that has what they'll call "0% introductory APR." And you're just transferring balances, and for anywhere from 12 to 21 months, you'll be able to go interest free. If you look at the actual financials or the economics of why it makes sense, if you think about it in investing terms, we're The Motley Fool, born and bred investors; we essentially aim for outperforming the market by a small percentage point, say, 8% per year. Over time, that compounds in our favor and turns into a meaningful sum.
Now, when you're paying that out in interest, and many times double that rate, sometimes it's as high as 29.99% for a credit card APR, you can see where it starts to make sense and say, "OK, I've got to do whatever I can in my power to pay down debt faster so I can start securing financial security, paying the kid's tuition, any of the regular, bigger life purchases or investing in your future."
Douglass: Yeah, absolutely. It totally makes sense when you have a balance, and you don't want to pay interest on it to go ahead and do that balance transfer and then attempt to pay it off during that time. One of the nice things here is that, if you had, let's say, I'm making up the numbers here, but a $250 payment, $200 of which was principal and $50 of which was interest, well then, suddenly, that $250 can now be used 100% for principal, which can enable you to pay it down faster and not be incurring interest charges.
Hamilton: And the one thing to point out, just to kind of put it in dollars and cents, I've worked out a calculation here. An average balance transfer credit card APR is going to be around 18.49%. If you were to pay down a $10,000 balance over three years, you're incurring $3,103 in interest charges alone. Now, there aren't balance-transfer cards out there than span three years, but 21 months for some cards that we've seen on the market is a significant amount of time to give you some leeway and start chipping away at that debt faster. So it certainly makes sense.
I would say, one big thing to look at is, there are so many credit cards on the market that offer no annual fee. Definitely focus on those when you're looking at a balance-transfer credit card, because there really shouldn't be any annual-fee out-of-pocket cost, and there are some balance-transfer credit cards that will even waive the balance-transfer fee.
Douglass: Nice. Of course, many times you need good credit to do a balance-transfer card, but you don't always have to have really great credit. Sometimes you can just do it with fair credit. Of course, if you've got poor credit, that tends to be kind of a different situation, but something for us to keep in mind.
Hamilton: Yeah, if you look at sort of credit score requirements, fair credit and better will generally get you a balance-transfer credit card. And fair credit, where we put that on a FICO score range, is kind of low to mid-600s, and as you go up the spectrum, as you get excellent credit, you're going to qualify for those, say, 21-month offers. Even in some cases, you may qualify with good credit.
Douglass: Absolutely. Cool, well, as always, we've got a lot more information, including some free guides, at fool.com/creditcards. We've got the picks for the best balance-transfer credit cards and a free guide, "5 Steps to Increase Your Credit Score Over 800." I am trying two of the tips from that, and so I'm very excited to see what my credit score will hopefully look like in a couple of months.
Hamilton: Yeah, let us know.
Douglass: Thanks, Nathan.
Hamilton: Thank you.
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