A lot of my friends are about to graduate from their graduate degree programs with a ridiculous amount of debt. Talking to them about their financial woes definitely brought back old memories of my own money struggles. My friends’ confessions also inspired me to write about the personal approach I took to paying off my student credit card debt more aggressively.
Before I offer any advice, however, let me paint a picture of my earlier financial self. The mentality I had in my final year of college definitely ran along the lines of “It’s my last year to be an irresponsible, young adult. I’ll have a full-time job to pay off these expenses in no time. Let’s face it, the last year of university is spent on #YOLO purchases and experiences.” This was my end-of-college financial mantra.
I ate out very often and spent loads of money on breakfast, lunch, dinner, mid-day snacks, second dinners, and after-dinner snacks…it was unhealthy for both my body and my wallet. This also happened to be the year that I cut myself off from my parents’ financial umbilical cord. Since I never had a paying job before, the pretty piece of plastic I had reserved for emergency-only expenses became my best friend in the last year of university as I indulged in frequent spending.
By the time I graduated, I had racked up quite a bit of credit card debt. Thinking back, it must’ve been around $4,000 (which also happened to be my credit limit). Thankfully, I did get a job right out of university, so I was able to pay a little bit more than the monthly minimum to fight down this staggering sum.
I soon realized, however, that my monthly payments were paying only for the interest I was accruing (plus a very, very small portion of my actual debt). So, even though I was consistently paying off debt every month, my debt level stayed pretty much the same. It continued to eat away at my earnings and accrue interest every month that it refused to budge. I felt stuck, and began to lose motivation; what good did it do to throw money at debt if my responsibility couldn’t make it disappear?
Then, I discovered balance transfer credit cards. If you’re in debt and don’t know what a balance transfer credit card is, pay attention. In my personal experience, this type of card — when used wisely and with caution and forethought — helped me break through the cycle of paying off interest so that I could pay off my actual credit card debt (a process that helped me regain control of my finances much, much faster).
So, what is a balance transfer card? It’s a credit card that offers you a low-interest rate (sometimes 0%) for a finite period of time — normally between six and 18 months — on the debt sums that you transfer to the balance transfer card from another credit card (which is charging you a higher interest on the debt). For me, the balance transfer credit card was a great tool because I saved up to 20% in annual interest costs on my existing debt. In other words: the payments I made towards the debt I had moved to my new, balance transfer card went directly to my debt (the 0% interest rate of the new card allowed me to side-step my interest-paying tailspin).
Now, I know this offer seems too good to be true. And you’re right, in a way: if you’re not careful, this card can come back to bite you. So, before you run off and open up one of these puppies, there are several considerations you need to take into account. Here’s what you need to know before you apply for a balance transfer credit card:
1. The card is a temporary solution. These special, low-interest rates are only offered for a limited time. Once the promotional period is over, your balance will be subject to a much higher-interest rate. Therefore, you have to be extremely disciplined and pay off most — or all — of your debt during the promotional period. If you don’t, you’ll have to start digging yourself out of debt all over again.
2. The card is a partial solution. The credit limit on most balance transfer cards is usually very low, so it’s not like you’re going to be able to transfer all your outstanding debt in one go; you’ll have to make multiple transfers (which charge a fee per transfer) and pay off each transfer sum in chunks.
3. Calculate the fees before you apply. Not all balance transfer cards offer a 0% interest rate. You need to calculate all the fees attached — such as the balance transfer fee, annual fee, and interest fees if you don’t get a 0% APR card. If your fees outweigh the actual interest savings that this card promises, you should not open up this card!
4. Don’t use the balance transfer card for new purchases. New purchases are charged at a much higher-interest rate, normally between 12% and 23%. The 0% APR balance transfer offer doesn’t apply to new purchases (only to debt sums transferred to the card), so don’t make any purchases until you pay off your debt!
5. You need good credit. In order to get approved for a 0% APR card, like the MBNA Platinum Plus MasterCard (Canada) or the BankAmericard Credit Card (U.S.), you need to have good credit. “Good” means a credit score in the 700s for Canada and the United States. Not only you need an excellent credit score to be approved, but the assessment process usually leaves a “hard inquiry” on your record, which can impact your credit score.
6. Do your own research. This Credit Karma article is a good start for blazing your own trail of inquiry about whether a balance transfer credit card is right for you.
My hope is that the advice I offered above will help TFD readers who are facing high credit card debt, whether those TFD-ers are students or not! Thanks for reading, and good luck — I’m rooting for you!
Kayla Reyes is a marketing professional based in Toronto who spends her free time stressing about her favorite sports teams, inhaling all the bread in the world and obsessing over her two-year-old nephew, Grayson. Follow her on Twitter and Instagram.
Image via Picjumbo