The saying goes that "nothing worth doing is ever done easily." Those are wise words, but they're not universally true -- especially when it comes to paying off debt. While credit card debt can be a burden that you can't get rid of without meaningful sacrifices, there are ways to start chipping away at your debt without cutting your spending.
The Motley Fool analysts Michael Douglass and Nathan Hamilton discuss three such strategies in the video segment below, including what to know about balance-transfer credit cards and cutting your interest costs.
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Michael Douglass: So, Nathan, let's talk about three ways to eliminate credit card debt faster without cutting your spending.
Nathan Hamilton: That's the important part.
Douglass: Which is, you know, kind of a big deal. This of course assumes that you're not already spending more than you're bringing in, right? Because of course, for you to eliminate credit card debt, you have to be able to pay some of it down.
With that in mind, let's talk about balance transfers, which are just a huge and, I suspect, under-utilized tool that a lot of people don't know about it.
Hamilton: Yeah, they're popular, but more people should be using them with the amount of credit card debt that we see Americans carrying. I'm looking at a balance transfer, it's fairly straight-forward. You're moving a transfer, or you're moving a balance from a card that's incurring interest to a card that isn't incurring interest for a certain promotional period. Generally, 15 to 21 months is what you're going to see with a balance transfer.
You pay a fee, of course, to move the money across in most instances. But that's a way where you can avoid interest during that promotional period and pay down your debt faster, and you're really not changing your spending. If you're already making that payment on the card, you're chipping away at the balance faster on the card that has a 0% interest rate.
Douglass: Right, exactly. So if for example, we're paying $500 a month, and $200 of it was interest, and $300 of it was principal, suddenly all $500 of it is principal.
Hamilton: That's huge.
Douglass: That can make a big difference very quickly.
Hamilton: You're not cutting your spending.
Douglass: Right, exactly. You're not affecting your payment, you're just affecting what you're paying for. Let's also talk about asking for a lower rate. Now this is one of those things that I think most people just don't even think about.
You can call up your credit card issuer and say, "Hey, listen. Can you help me out here a little bit?" And I've often found when asking for all sorts of things, whether it's paying less for my car at the mechanic, cellphone bill -- if you just ask, you're able to get some money back.
Hamilton: Yeah, plead your case. I mean, when you look at it from a credit card issuer's perspective, they want to see that you're using the card frequently and charging transactions. They want to see that you're incurring interest, because that's money for them, part of their business model.
So if you can make your case and say, "I've been with Bank X for three years. I've paid my balances on time. I've got X on credit. I've got a good credit. Maybe I've got fair credit," whatever you can do to plead your case and say, "Okay. Would you be willing to drop the interest rate?" By simply asking, many times, you're going to get some sort of waiver or some sort of discount on your interest rate, and that's a way again of cutting debt without impacting your spending at all.
Douglass: Mm-hmm. The third one, I think probably the most controversial, is a HELOC, or a home equity loan. So, essentially, this is a debt arbitrage issue. So if you have credit card at 18% interest and you're able to trade that off for some home equity debt at say, 6% interest, that's 12 percentage points of interest you've been able to sort of wipe out. That's sort of two-thirds of the interest you're paying.
That, theoretically, should help you pay off debt faster because again, you're paying more principal and less interest if you keep your payments the same, and make just generally your debt picture a little bit easier for you.
Hamilton: Yeah, if you can trade from a high-rate debt to a lower-rate debt, there are benefits to it. Now, there are also downfalls, yeah. You have to look at it because you're tapping your home equity, which has a volatility to it and so forth. But if you can do it, many times, the benefits of chipping away at principal faster and not paying out interest are going to have these sort of very sharp effects to paying down your balances over time. Anything you can do to get more principal paid down faster is really going to benefit your finances.
Douglass: Absolutely. We've got these and a lot of other debt tactics and strategies at Fool.com/creditcards. A lot more information about how to think about using your credit as wisely as possible. Also, our picks for the best credit cards so that you, when you're thinking about a balance transfer or something like that. Come on over, and we've got a lot of information that can help you make the best decision for you. Check us out again at Fool.com/creditcards.
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