Banks and retail stores are constantly enticing consumers with their offers. Credit cards from financial institutions (like banks, not retail stores) come with different bells and whistles. Cash back, rewards, double cash-back, zero percent on balance transfers, no membership fee. The list goes on. It’s reasonable to be anxious about credit card usage. If you’re not careful, you can fall in the perpetual debt trap. However, with some restraint, you can make credit cards work to your advantage.
Let’s talk about bank credit cards for a minute here. A week doesn’t go by where the mail carrier is not stuffing your mailbox with bank credit card offers of all kinds. If you already have a credit card, your issuer may send you checks to use to transfer balances at zero percent (for a SMALL fee) for what seems like an eternity. These zero percent balance transfer offer periods have increased quite dramatically over the years, which is a good thing. These offers used to be about six months in duration. Nowadays, it’s not uncommon to get 18-month zero percent offers. Why? Because they know that once you transfer a balance over from another credit card, you will likely make minimum payments. Once the offer expires, they’ll get you with the typical 15.99% or higher interest rate which will perpetuate you being in debt. You should not apply for every credit card offer you receive in the mail (it will negatively affect your FICO score), however, you can play the balance transfer game under a few conditions, one of them being that you are disciplined in your payment schedule and avoid incurring additional debt. Let’s look at an example where you’re carrying a balance of $1,500.00 on one credit card. The current annual rate is 15.99%. You have a second credit card with no balance (which is the one you’re going to transfer the balance to), or you’ve been waiting for the right time to apply for that second credit card offer that came in the mail. The assumption is that you’ve already decided to eliminate the current balance so you’re willing to pay $125 monthly, which is much more than the minimum required monthly payment.
|Credit Card||Balance||Annual Interest||Monthly Payment||Months to Liquidate||Total Paid||Interest Paid|
|Your Second Card||$1560*||0% for 12 months||$130||12||$1,560||$60|
The 12-month, zero percent balance transfer offer is not free, but is much cheaper than 15.99% annual rate. The card issuer will charge you an upfront fee, typically between 3% and 4% of the amount of the balance transfer. We’ll use 4% as our example. This is the equivalent of a 12-month loan at a 4% interest rate. That’s why we’re showing the balance on ‘Your Second Card’ in the table above as $1560, as opposed to $1500 on your ‘Primary Card’. By dividing the balance you transferred (including the 4% fee) into 12 equal monthly payments, you SAVE $85 as compared to your ‘Primary Card’. This is another way Lypper helps YOU keep more of YOUR money.