Many consumers are still getting help with debt

At the end of December 2020, around 2.87% of accounts in the auto, credit card, mortgage or unsecured personal loan accounts were still in some form of financial hardship status.

But the percentage of accounts in that status continue to fall from a high of 4.77% in May 2020, according to TransUnion’s Financial Services Monthly Industry Snapshot Report.

TransUnion data includes all of the accounts with accommodations at the end of December plus those that had accommodations pre-pandemic.

The percentage of credit card accounts in financial hardship status fell from a high of 3.73% in May 2020 to 2.42% in December 2020. 

Repayment preferences vary

Among those consumers with loan accommodations, plans to repay the money were diverse, according to TransUnion.

The research showed that around 25% of them want to return to making regular payments and negotiate with lenders to increase the length of the loan, while 19% would like to continue the accommodation and 17% want to catch up by making bigger payments.

See related: Credit card spending rebounds from pandemic plunge

Delinquencies and hardship program situation surprisingly positive

Ted Rossman, industry analyst for CreditCards.com, said that in general, the outlook for delinquencies and hardship programs is surprisingly positive.

“Delinquencies have actually fallen during the pandemic and fewer customers than we initially expected have enrolled in hardship programs, plus many have already gotten back on track,” Rossman said.

For example, Chase reported that more than 90% of customers who exited their assistance program have remained current on their payments.

And, according to the ABA Banking Journal, “Bank card delinquencies fell 109 basis points to 1.52% of all accounts in the second quarter, declining to the lowest level on record. In the third quarter they were essentially flat.”

Rossman noted that government stimulus programs deserve a lot of credit, along with many consumers spending less and making debt payoff a priority.

“It seemed like the stimulus impact was starting to wane late in 2020, but Congress and the Trump Administration agreed on another round of stimulus right before New Year’s and the Biden Administration is intent on implementing an even larger program soon,” Rossman said.

Rossman said we’re not out of the woods yet, but there’s growing optimism that the worst has passed and we will not see nearly as many delinquencies and defaults as we did during the 2007-2009 financial crisis.

See related: What to do if your credit card is closed due to delinquency

Source: creditcards.com

Debt Settlement vs Bankruptcy: Which is Best?

You’ve tried debt payoff strategies, balance transfers, consolidation, and even debt management; you’ve begged your creditors, liquidated your assets, and pestered your friends and families for any money they can afford, but after all of that, you still have more debt than you can handle.

Now what?

Once you reach the end of your rope, the options that remain are not as forgiving as debt management and they’ll do much more damage to your credit score than debt payoff strategies. However, if you’ve tried other forms of debt relief and nothing seems to work, all that remains is to consider debt settlement and bankruptcy.

Debt settlement is a very good way to clear your debt. It’s one of the cheapest and most complete ways to eradicate credit card debt and can help with most other forms of unsecured debt as well. Bankruptcy, on the other hand, is a last resort option for debtors who can’t meet those monthly payments and have exhausted all other possibilities.

But which option is right for you, should you be looking for a debt settlement company or a bankruptcy attorney?

Similarities Between Bankruptcy and Debt Settlement

Firstly, let’s look at the similarities between bankruptcy and debt settlement, which are actually few and far between. In fact, beyond the fact that they are both debt relief options that can clear your debt, there are very few similarities, with the main one being that they both impact your credit score quite heavily.

A bankruptcy can stay on your credit report for up to 10 years and do a lot of damage when it is applied. It may take several years before you can successfully apply for loans and high credit lines again, and it will continue to impact your score for years to come.

Debt settlement is not quite as destructive, but it can reduce your credit score in a similar way and last for up to 7 years. Accounts do not disappear in the same way as when you pay them in full, so future creditors will know that the accounts were settled for less than the balance and this may scare them away.

In both cases, you could lose a couple hundred points off your credit score, but it all depends on how high your score is to begin with, as well as how many accounts you have on your credit report and how extensive the settlement/bankruptcy process is.

Differences Between Bankruptcy and Debt Settlement

The main two types of bankruptcy are Chapter 7 and Chapter 13. The former liquidates assets and uses the funds generated from this liquidation to pay creditors. The latter creates a repayment plan with a goal of repaying all debts within a fixed period of time using an installment plan that suits the filer.

Debt settlement, on the other hand, is more of a personal process, the goal of which is to offer a reduced settlement sum to creditors and debt collectors, clearing the debts with a lump sum payment that is significantly less than the balance.

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

When people think of bankruptcy, it’s often a Chapter 7 that they have in mind. With a Chapter 7 bankruptcy, all non-exempt assets will be sold, and the money then used to pay lenders. There are filing costs and it’s advised that you hire a bankruptcy attorney to ensure the process runs smoothly.

Chapter 7 bankruptcy is quick and complete, typically finishing in 6 months and clearing most unsecured debts in this time. There is no repayment plan to follow and no lawsuits or wage garnishment to worry about.

Chapter 13, on the other hand, focuses on a repayment plan that typically spans up to 5 years. The debts are not wiped clear but are instead restructured in a way that the debtor can handle. This method of bankruptcy is typically more expensive, but only worthwhile for debtors who can afford to repay their debts.

Filing for bankruptcy is not easy and there is no guarantee you will be successful. There are strict bankruptcy laws to follow and the bankruptcy court must determine that you have exhausted all other options and have no choice but to file.

Bankruptcy will require you to see a credit counselor, which helps to ensure that you don’t make the same mistakes in the future. This can feel like a pointless and demeaning requirement, as many debtors understand the rights and wrongs and got into a mess because of uncontrollable circumstances and not reckless spending, but sessions are short, cheap, and shouldn’t cause much stress.

How Debt Settlement Works

The goal of debt settlement is to get creditors to agree to a settlement offer. This can be performed by the debtor directly, but it’s often done with help from a debt settlement company.

The debt specialist may request that you stop making payments on your debts every month. This has two big benefits:

1. More Money

You will have more money in your account every month, which means you’ll have more funds to go towards debt settlement offers. 

The idea of making large lump sum payments can seem alien to someone who has a lot of debt. After all, if you’re struggling to make $400 debt payments every month on over $20,000 worth of debt, how can you ever hope to get the $5,000 to $15,000 you need to clear those debts in full?

But if you stop making all payments and instead move that money to a secured account, you’ll have $4,800 extra at the end of the year, which should be enough to start making those offers and getting those debts cleared.

2. Creditor Panic

Another aspect of the debt settlement process that confuses debtors is the idea that creditors would be willing to accept reduced offers. If you have a debt worth $20,000 and are paying large amounts of interest every month, why would they accept a lump sum and potentially take a loss overall?

The truth is, if you keep making monthly payments, creditors will be reluctant to accept a settled debt offer. But as soon as you start missing those payments, the risk increases, and the creditor faces the very real possibility that they will need to sell that debt to a collection agency. If you have a debt of $20,000, it may be sold for as little as $20 to $200, so if you come in with an offer of $10,000 before it reaches that point, they’ll snap your hand off!

Types of Debt

A debt settlement program works best when dealing with credit card debt, but it can also help to clear loan debt, medical bills, and more. Providing it’s not government debt or secured debt, it will work. 

With government debt, you need specific tax relief services, and, in most cases, there is no way to avoid it. With secured debt, the lender will simply take your asset as soon as you default.

Debt settlement companies may place some demanding restrictions on you, and in the short term, this will increase your total debt and worsen your financial situation. In addition to requesting that you stop making monthly payments, they may ask that you place yourself on a budget, stop spending money on luxuries, stop acquiring new debt, and start putting every penny you have towards the settlement.

It can have a negative impact on your life, but the end goal is usually worth it, as you’ll be debt-free within 5 years.

Pros and Cons of Debt Settlement and Bankruptcy

Neither of these processes are free or easy. With bankruptcy, you may pay up to $2,000 for Chapter 7 and $4,000 for Chapter 13 (including filing fees and legal fees) while debt settlement is charged as a fixed percentage of the debt or the money saved. 

As mentioned already, both methods can also damage your credit score. But ultimately, they will clear your debts and the responsibilities that go with them. If you’ve been losing sleep because of your debt, this can feel like a godsend—a massive weight lifted off your shoulders.

It’s also worth noting that scams exist for both options, so whether you’re filing bankruptcy or choosing a debt settlement plan, make sure you’re dealing with a reputable company/lawyer and are not being asked to pay unreasonable upfront fees. Reputable debt settlement companies will provide you with a free consultation in the first instance, and you can use the NACBA directory to find a suitable lawyer.

Bankruptcy and Debt Settlement: The End Goal

For all the ways that these two options differ, there is one important similarity: They give you a chance to make a fresh start. You can never underestimate the benefits of this, even if it comes with a reduced credit score and a derogatory mark that will remain on your credit report for years to come.

If you’re heavily in debt, it can feel like your money isn’t your own, your life isn’t secure, and your future is not certain. With bankruptcy and debt settlement, your credit score and finances may suffer temporarily, but it gives you a chance to wipe the slate clean and start again.

What’s more, this process may take several years to complete and in the case of bankruptcy, it comes with credit counseling. Once you make it through all of this, you’ll be more knowledgeable about debt, you’ll have a better grip on your finances, and your impulse control. 

And even if you don’t, you’ll be forced to adopt a little restraint after the process ends as your credit score will be too low for you to apply for new personal loans and high limit cards.

Other Options for Last Ditch Debt Relief

Many debtors preparing for debt settlement or bankruptcy may actually have more options than they think. For instance, bankruptcy is often seen as a get-out-of-jail-free card, an easy escape that you can use to your advantage whenever you have debts you don’t want to pay.

But that’s simply not the case and unless you have tried all other options and can prove that none of them have worked, your case may be thrown out. If that happens, you’ll waste money on legal and filing fees and will be sent back to the drawing board.

So, regardless of the amount of debt you have, make sure you’ve looked into the following debt relief options before you focus on debt settlement or bankruptcy. 

Debt Consolidation

A debt consolidation loan is provided by a specialized lender. They pay off all your existing debts and give you a single large loan in return, one that has a lower interest rate and a lower monthly payment. 

Your debt-to-income ratio will improve, and you’ll have more money in your pocket at the end of the month. However, in exchange, you’ll be given a much longer-term, which means you’ll pay more interest over the life of the loan.

A Debt Management Plan

Debt management combines counseling services with debt consolidation. A debt management plan requires you to continue making your monthly payment, only this will go to the debt management company and not directly to the creditors. They will then distribute the money to your creditors.

You’ll be given a monthly payment that you can manage, along with the budgeting advice you need to keep meeting those payments. In exchange, however, you’ll be asked to close all but one credit card (which can hurt your credit score) and if you miss a payment then your creditors may back out of the agreement.

Balance Transfer Card

If all your debts are tied into credit cards, you can use a balance transfer credit card to make everything more manageable. With a balance transfer credit card, you move one or more debts onto a new card, one that offers a 0% APR for a fixed period. 

The idea is that you continue making your monthly payment, only because there is no interest, all the money goes towards the principal.

Home Equity Loans

If you have built substantial equity in your home then you can look into home equity loans and lines of credit. These are secured loans, which means there is a risk of repossession if you fail to keep up your payments, but for this, you’ll get a greatly reduced interest rate and a sum large enough to clear your debts.

Bottom Line: The Best Option

Debt settlement and bankruptcy are both considered to be last resort debt-relief options, but they couldn’t be more different from one another. Generally speaking, we would always recommend debt settlement first, especially if you have a lot of money tied up in credit card debt.

If not, and you can’t bear the idea of spending several months ignoring your creditors, missing payments, and accumulating late fees, it might be time to consider bankruptcy. In any case, make sure you exhaust all other possibilities first.

Debt Settlement vs Bankruptcy: Which is Best? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Minimum Payments on a Credit Card

Your minimum monthly payment is the lowest amount that you need to pay on your credit card balance. Any less could result in a derogatory mark, any more will clear more of the principal. 

Your monthly payment is one of the most important aspects of your credit card debt and failure to understand this could seriously impact your credit score and leave marks on your credit report that remain for up to 7 years.

With that in mind, let’s take a closer look at how these payments operate and how you can quickly clear your credit card debt.

How Minimum Payments on a Credit Card are Calculated

The minimum payment is calculated as a percentage of the total balance at the end of the month. This percentage ranges from 2% to 5%, but it has been known to go lower. 

As an example, if you have a $5,000 credit card balance and are required to pay 5% a month, then your monthly payment will be $250. However, this only covers the principal, which is the money that you borrowed. It does not cover the interest, which is where things get a little complicated and expensive.

What Influences Your Minimum Monthly Payment?

The reason credit card interest is so high is because it compounds. This means that if you have an annual percentage rate of 20% and a debt of $20,000, that debt will climb to $24,000, at which point the next billing cycle will commence and this time you’ll be charged 20% on $24,000 and not $20,000.

However, credit card interest is calculated daily, not yearly. To arrive at your daily percentage rate, simply divide your interest rate by 365 (the number of days in a year) and then multiply this by your daily balance.

For example, if we stick with that 20% interest rate, then the daily rate will be 0.00054%. If we multiply this with the daily balance, we get an interest rate of $2.7 for the first day. Multiply this by 30, for the total days in a billing cycle, and it’s $81. That’s your total interest for the first month.

So, when we calculate the 2% minimum monthly payment, we’re calculating it against $5,081, not $5,000, which means we get a total of $101.62, reducing the balance to just $479.38.

In other words, you pay over $100, but reduce the balance by a little over $20 when you make that monthly payment. If penalty fees and interest rates are added to that, it will reduce in even smaller increments.

Pros and Cons of Only Paying the Minimum Payment on your Credit Card

As discussed above, it’s imperative that you make the minimum payment, avoiding any late payment charges or credit score reductions. However, if you only make those minimum payments every month then it will take a long time to clear your balance and you may struggle to keep your head above water.

The Benefits of Paying More Than the Minimum

Many borrowers struggle to pay more than the minimum not because they don’t have the money, but because they fail to see the benefits. They focus on the short-term and not the long-term, seeing an extra $100 payment as a lost $100 in the present, as opposed to a saved $500 in the future.

However, if you can get over this mindset and start paying more than the minimum, you will do your future self a huge favor, helping with all of the following:

Shorten the Term and Lessen the Interest

Every extra dollar that you add to your minimum payment can help you get out of debt quicker than if you simply stick with the minimum. This is true for all debts—a higher monthly payment means that more money goes towards the principal, which means there is less interest to compound.

Credit card debt is like a snowball gathering momentum as it rolls, and this is exacerbated every time you miss a payment and are hit with penalty fees. By paying more than the minimum, you’re taking a giant chunk out of that snowball and slowing its progression.

You’ll Improve Your Credit Utilization

Your credit utilization ratio is one of the most important parts of your credit report, counting for 30% of your total. This ratio takes your total available credit (such as a credit limit on a credit card) and then compares it to total debt (such as the balance on that credit card). The higher the number, the more of your credit has been used and the more your credit score will suffer.

Every time you pay more of your credit card balance, you’re reducing this score and significantly boosting your credit score.

Avoid Maxing Out Your Balance

Not only will a maxed-out credit card do some serious damage to your credit utilization score, but it can also have a direct impact on your credit score on the whole. Lenders don’t want to see it and credit bureaus will punish you for it. If you’re still using the card and only paying the minimum, you may be stuck in a cycle of persistent debt, but by paying more and using it less, you can prevent that.

You May Get a Better Credit Limit

Credit card issuers monitor their customer’s activities very closely. If they clear their balances every month without issue, they are more inclined to increase their credit limit, offer them rewards, and generally provide them with good opportunities. If they are accumulating large amounts of credit card debt and only meeting their minimum payments, they’ll be less inclined to do any of those things.

It always helps to get on a creditor’s good side, because you never know when you will need that improve credit limit or access to that generous rewards scheme.

What Happens if you Only Make the Minimum Payment?

If you only pay the minimum, the debt will take a long time to clear and you’ll repay huge sums of interest in that time. If we go back to the previous example and assume an APR of 20%, a balance of $5,000 and a minimum payment of 2%, you will repay over 400% in interest alone and it will take you decades to repay the debt.

Thankfully, very few credit card providers will actually let you pay such a small amount on such a substantial debt. But even if we increase the minimum payment to 5%, it still looks abysmal for the borrower. It would take them about 9 years to pay the balance, requiring $250 a month and paying close to $2,500 in interest.

Although it’s more realistic, this is still a poor option, especially when you consider the card will still be active and you may still be using it, which means that every time you make a repayment, you’re adding more debt and offsetting all your hard work.

Your credit score will not suffer if you only make the minimum payment. Providing you make it on time then you will build a respectable payment history, a stable credit report, and a credit score that is sure to impress lenders. However, it won’t look great for your finances as you’re giving yourself an expensive liability that will cripple your debt-to-income ratio and your credit utilization ratio for years to come.

Are There Any Advantages to Just Paying the Minimum?

The only advantage to paying just the minimum is that you will have more money in your pocket at the end of the month, which will allow you to make additional investments and purchases that would otherwise not be available to you. However, this is a pretty narrow-minded way of looking at it, because while you will have more cash in the long-term, it comes at the expense of many additional risks and obligations, not to mention thousands of dollars’ worth of additional interest paid over the term.

What Happens if you Can’t Pay the Minimum Payment?

If there is a late payment or a missed payment, your creditor may charge you a penalty fee or a penalty rate. If your payment is due for more than 30-days they may also report you to the credit bureaus, at which point a derogatory mark will appear on your credit report and your credit score will drop.

This can happen even with a single missed payment, which is why you should never simply skip a payment on the basis that you’ll just double-up next time around.

Instead, contact your creditor, explain your situation, and see if there is anything they can do to help you. They may say no, but it doesn’t hurt to ask, and, in most cases, they will offer you some kind of reprieve. After all, they want their money, and if they can increase their chances of getting paid by providing you with some leeway, they’ll often be more than happy to do it.

Some people believe that you can simply pay a few dollars and it will count as a minimum payment and not show on your credit report. This is a myth. Technically, any payment that doesn’t meet the full minimum requirement can be classed as a late payment and can lead to fees and derogatory marks.

Resources to Lower Minimum Payments on a Credit Card

It’s important to keep a close eye on your credit card statement and activity at all times. Monitor your spending, making sure it doesn’t go overboard, and if you find yourself struggling to make payments at any time, checkout the following resources and options to get the help you need:

  • Credit Counselors: Speak with a trained expert who has helped many individuals in a similar position. They will discuss your finances and your debts and will help you to find a solution.
  • Debt Management: A debt management plan can help when you’re struggling to meet your debt obligations and have a huge debt-to-income ratio. They will provide assistance and help you swap multiple debts for a single consolidation loan.
  • Debt Settlement: An option that works best for individuals with multiple debts and missed payments. It’s one of the cheapest ways to clear personal loan and credit card debt, as well as other forms of unsecured debt.
  • Debt Consolidation: Another consolidation loan option, this time with a long term, ensuring that you pay less per month but more over the term. This is a good option if you’re stuck in a tricky spot right now and need to reduce your outgoings.

In all the above cases, you can use the NMLS Consumer Access site to find a legitimate and reputable company or professional working within the financial sector. You can also use resources like the Better Business Bureau as well as the many guides, reviews, and help files right here on the Pocket Your Dollars website.

How to Reduce the Balance on a Credit Card Debt

One of the best ways to reduce your balance is to initiate a balance transfer. As the name suggests, this entails moving your balance from one card to another. Balance transfer cards entice you by offering a 0% APR on all transfers and this lasts for up to 18% with the best providers. 

In that time, you won’t pay any interest on your balance, which means all your monthly payment will go towards the principal and you can reduce your debt in huge leaps as opposed to small steps.

These cards are not without their issues, however. You will need a good credit score to get a card that has a good APR and balance transfer offer. If you don’t, and you fail to clear the balance during that introductory period, you may be paying more interest than you were before.

In most cases, though, these cards will be just what you need to ease the burden of mounting credit card debts and get back into the black. Take a look at our guide to the best balance transfer cards to learn more and discover how you can move your current balance to a card that has more preferable terms, in the short-term at least.

The Bottom Line: Clear that Balance

A minimum payment is the least amount you need to commit to a credit card balance. If credit card debt was a house party, the minimum payment would be the equivalent of showing up, saying your introductions, and then hiding in the corner for the rest of the night. If you really want to make an impact, you need to be proactive.

It doesn’t have to be twice or thrice the size of your minimum payment. It doesn’t have to be a consistent sum that you pay every month, but it does have to be something. Don’t worry if it’s only 1% or 2% of the balance, because every additional payment helps. Just pay whatever you can afford, whenever you can afford it. A small amount of money today can save you a huge sum of money in the future.

Minimum Payments on a Credit Card is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Credit Card Balance Transfers

Credit card balances are crippling households across the United States, giving them insurmountable debts that just keep on growing and never seem to go away. But there is some good news, as this problem has spawned a multitude of debt relief options, one of which is a credit card balance transfer.

Balance transfers are a similar and widely available option for all debtors to clear their credit card balances, reduce their interest rate, and potentially save thousands of dollars.

How Credit Card Balance Transfers Work

A balance transfer credit card allows you to transfer a balance from one or more cards to another, reducing credit card debt and all its obligations. These cards are offered by most credit card companies and come with a 0% APR on balance transfers for the first 6, 12 or 18 months.

Consumers can use this balance transfer offer to reduce interest payments, and if they continue to pay the same sum every month, all of it will go towards the principal. Without interest to eat into their monthly payment, the balance will clear quickly and cheaply.

There are a few downsides to transferring a balance, including late fees, a transfer fee and, in some cases, an annual fee.

What Happens When You Transfer a Balance on Credit Cards?

When you transfer a balance, your new lender repays your credit card debt and moves the funds onto a new card. You may incur a transfer fee and pay an annual fee, which can increase the total debt, but transferring a balance in this way allows you to take advantage of a 0% introductory APR. While this introductory period lasts, you won’t pay any interest on your debt and can focus on clearing your credit card debt step by step.

Why are Balance Transfers Beneficial?

A little later, we’ll discuss some alternatives to a balance transfer offer, all of which can help you clear your debt. However, the majority of these methods will increase your debt in the short term, prolong the time it takes to repay it or reduce your credit score. 

A balance transfer credit card does none of these things. As soon as you accept the transfer offer, you’ll have a 0% introductory APR that you can use to eliminate your debt. The balance transfer may increase your debt liabilities slightly by adding a transfer fee and an annual fee, but generally speaking, this is one of the best ways to clear your debt.

To understand why this is the case, you need to know how credit card interest works. If you have a debt of $20,000 with a variable APR rate of 20% and a minimum monthly payment of $500, you’ll repay the debt in 67 months at a cost of over $13,000 in interest.

If you move that debt to a card with a balance transfer offer of 0% APR for 12 months, and you continue to meet the $500 minimum payment, you’ll repay $5,000 and reduce the debt to $15,000. From that point on, you’ll have a smaller balance to clear, less interest to worry about, and can clear the debt completely in just a few more years.

Of course, the transfer fee will increase your balance somewhat, but this fee is minimal when compared to the money you can save. The same applies to the annual fee that these cards charge and, in many cases, you can find cards that don’t charge an annual fee at all. 

You can even find no-fee balance transfer cards, although these are rare. The BankAmericard credit card once provided a no fee transfer offer to all applicants, in addition to a $0 annual fee. However, they changed their rules in 2018 and made the card much less appealing to the average user.

Pros and Cons of Credit Card Balance Transfers

From credit score and credit limit issues to a high variable APR, late fees, and cash advance fees, there are numerous issues with these cards. However, there are just as many pros as there are cons, including the fact that they can be one of the cheapest and fastest ways to clear debt.

Pro: 0% Introductory APR

The 0% APR on balance transfers is the best thing about these credit cards and the reason they are so beneficial. However, many cards also offer 0% APR on purchases. This means that if you continue to use your card after the transfer has taken place, you won’t be charged any interest on the new credit.

With most cards, the 0% APR on purchases runs for the same length of time as the balance transfer offer. This ensures that all credit you accumulate upon opening the account will be subject to the same benefits. Of course, accumulating additional credit is not wise as it will prolong the time it takes you to repay the debt.

Pro: Can Still Get Cash Rewards

While cash rewards are rare on balance transfer cards, some of the better cards still offer them. Discover It is a great example of this. You can earn cash back every time you spend, even after initiating a balance transfer. The cash rewards scheme is one of the best in the industry and there is also a 0% APR on balance transfers during an introductory period that lasts up to 18 months.

Pro: High Credit Limit

A balance transfer card may offer you a high credit limit, one that is large enough to cover your credit card debt. You will need a good credit score to get this rate, of course, but once you do your credit card debt will clear, you can repay it, and then you’ll have a card with a high credit limit and no balance.

Throw a rewards scheme into the mix (as with the Discover It rewards card) and you’ll have turned a dire situation into a great one.

Con: Will Reduce Credit Score

A new account opening won’t impact your credit score as heavily as you may have been led to believe. In fact, the impact of a new credit card or loan is minimal at best and any effects usually disappear after just a few months. However, a balance transfer card is a different story and there are a few ways it can impact your score.

Firstly, it could reduce your credit utilization ratio. This is the amount of credit you have compared to the amount of debt you have. If you have four credit cards each with a credit limit of $20,000 and a debt of $10,000 then your score will be 50%. If you close all of these and swap them for a single card where your credit limit matches your debt, your score will be 100%.

Your credit utilization ratio points for 30% of your total FICO score and can, therefore, do some serious damage to your credit score.

Secondly, although FICO has yet to disclose specifics, a maxed-out credit card can also reduce your score. By its very nature, a balance transfer card will be maxed out or close to being maxed out, as it’s a card opened with the sole purpose of covering this debt.

Finally, if you close multiple accounts and open a new one, your account age will decrease, thus reduce your credit score further.

Con: Transfer Free

The transfer fee is a small issue, but one worth mentioning, nonetheless. This is often charged at between 3% and 5% of the total balance, but there are also minimum amounts of between $5 and $10, and you will pay the greater of the two.

This can sound like a lot. After all, for a balance transfer of $10,000, 5% will be $500. However, when you consider how much you can save over the course of the introductory period, that fee begins to look nominal.

There may also be an annual fee to consider, but if your score is high enough and you choose one of the cards listed in this guide, you can avoid this fee.

Con: Late Fees and Other Penalties

In truth, all credit cards will charge you a fee if you’re late and you will also be charged a fee every time you make a cash advance. However, the fees may be higher with balance transfer cards, especially if those cards offer generous benefits and rewards elsewhere. It’s a balancing act for the provider—an advantage here means a disadvantage there.

Con: High APR on Purchases

While many balance transfer cards offer a 0% APR on purchases for a fixed period, this rate may increase when the introductory period ends. The resulting variable APR will often be a lot larger than what you were paying before the transfer, with many credit cards charging over 25% or more on purchases.

Which Credit Cards are Best for Clearing Credit Card Debt?

Many credit card issuers have some kind of balance transfer card, but it’s worth remembering that credit card companies aren’t interested in offering these cards to current customers. You’ll need to find a new provider and if you have multiple cards with multiple providers, that can be tricky. 

Run some comparisons, check the offers against your financial situation, and pay close attention to late fees, APR on purchases, cash rewards, and the length of the 0% introductory APR rate. 

You’ll also need to find a card with a credit limit high enough to cover your current debt, and one that accepts customers with your credit score. This can be tricky, but if you shop around, you should find something. If not, focus on increasing your credit score before seeking to apply again.

Here are a few options to help you begin your search for the most suitable balance transfer card:

Discover It

  • Balance Transfer Offer: 18 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 6 months
  • Annual Fee: $0
  • Rate: Up To 24.49% Variable APR
  • Rewards: Yes

Chase Freedom Unlimited

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 5% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.24% Variable APR
  • Rewards: Yes

Citi Simplicity

  • Balance Transfer Offer: 21 Months
  • Transfer Fee: 5% on transfers
  • Purchases APR: 0% for 12 months
  • Annual Fee: $0
  • Rate: Up To 26.24% Variable APR
  • Rewards: No

Bank of America Cash Rewards

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Capital One Quicksilver

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Blue Cash Everyday Card from American Express

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Capital One SavorOne

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: Yes

How to Clear Debt with a Balance Transfer Card

From the point of the account opening to the point that the introductory period ends, you need to focus on clearing as much of the balance as possible. Don’t concern yourself with a variable APR rate, annual fee or other issues and avoid additional APR on purchases by not using the card. Just put all extra cash you have towards the debt and reduce it one step at a time.

Here are a few tips to help you clear debt after you transfer a balance:

Meet the Monthly Payment

First things first, always meet your minimum payment obligations. The 0% APR on balance transfers protects you against additional interest, but it doesn’t eliminate your repayments altogether. If you fail to meet these payments, you could find yourself in some serious hot water and may negate the balance transfer offer.

Increase Payment Frequency

It may be easier for you to repay $250 every two weeks as opposed to $500 every month. This will also allow you to use any extra funds when you have them, thus preventing you from wasting cash on luxury purchases and ensuring it goes towards your debt.

Earn More

Ask for a pay rise, take on a part-time job, work as a freelancer—do whatever it takes to earn extra cash during this period. If you commit everything you have for just 12 to 18 months you can get your troublesome debt cleared and start looking forward to a future without debt and complications, one where you have more money and more freedom.

Sell Up

It has never been easier to sell your unwanted belongings. Many apps can help you with this and you can also sell on big platforms like Facebook, eBay, and Amazon. 

Sell clothes, electronics, books, games, music—anything you no longer need that could earn you a few extra dollars. It all goes towards your debt and can help you to clear it while your introductory APR is active.

Don’t Take out a Personal Loan

While you might be tempted to use a loan to cover your debt, this is never a good idea. You should avoid using low-interest debt to replace high-interest debt, even if the latter is currently under a 0% introductory APR. 

It’s easy to get trapped in a cycle of swapping one debt for another, and it’s a cycle that ultimately leads to some high fees and even higher interest rates.

Focus on the Bigger Picture

Debt exists because we focus too much on the short-term. Rather than dismissing the idea of buying a brand-new computer we can’t afford, we fool ourselves into believing we can deal with it later and then pay for it with a credit card. This attitude can lead to persistent debt and trap you in an inescapable cycle and it’s one you need to shed if you’re going to transfer a balance.

Instead of focusing on the short term, take a look at the bigger picture. If you can’t afford it now, you probably can’t afford it later; if you can’t repay $10,000 worth of debt this year, you probably can’t handle $20,000 next year.

Alternatives to Credit Card Balance Transfers

If you have the cash and the commitment to pay your credit card debt, a balance transfer card is perfect. However, if you have a low credit score and use the card just to accumulate additional debt and buy yourself more time, it will do more harm than good. In that case, debt relief may be the better option.

These programs are designed to help you pay your debt through any means possible. There are several options available and all these are offered by specialist companies and providers, including banks and credit unions. As with balance transfer cards, however, you should do your research in advance and consider your options carefully before making a decision.

Pay More Than the Minimum

It’s an obvious and perhaps even redundant solution, but it’s one that needs to be mentioned, nonetheless. We live in a credit hungry society, one built on impulsive purchases and a buy-now-care-later attitude. A balance transfer card, in many ways, is part of this, as it’s a quick and easy solution to a long and difficult problem. And like all quick patches, it can burst at the seams if the problem isn’t controlled.

The best option, therefore, is to try and clear your debts without creating any new accounts. Do everything you can to increase your minimum payment every month. This will ensure that you pay more of the principal, with the minimum payment covering your interest obligations and everything else going towards the actual balance.

Only when this fails, when you genuinely can’t cover more than the minimum, should you look into opening a new card.

Debt Consolidation

Balance transfers are actually a form of debt consolidation, but ones that are specifically tailored to credit card debt. If you have multiple types of debt, including medical bills, student loans, and personal loans, you can use a consolidation loan to clear it.

This loan will pay off all of your debts and then give you a new one with a new provider. The provider will reduce your monthly payment and may even reduce your interest rate, allowing you to pay less and to feel like you’re getting a good deal. However, this is at the expense of a greatly increased loan term, which means you will pay considerably more over the duration of the loan.

As with everything else, a debt consolidation loan is dependent on you having a good credit score and the better your financial situation is, the better the loan rates will be.

Debt Management

Debt management can help if you don’t have the credit history required for debt consolidation. Debt management plans are provided by companies that work with your creditors to repay your debts in a way that suits you and them. You pay the debt management company, they pass your money on, and in return, they request that you abide by many strict terms and conditions, including not using your credit cards.

Many debt management programs will actually request that you close all but one of your credit cards and only use that one card in emergencies. This can greatly reduce your credit score by impacting your credit utilization ratio. What’s more, if you miss any payments your creditors may renege on their promises and revert back to the original monthly payments.

Debt Settlement

The more extreme and cheaper option of the three, but also the riskiest. Debt settlement works well with sizeable credit card debt and is even more effective if you have a history of missed payments, defaults or collections. A debt specialist may request that you stop making payments on your accounts and instead put your money into a secured account run by a third-party provider.

They will then contact your creditors and negotiate a settlement amount. This process can take several years as they’re not always successful on the first attempt but the longer they wait, the more desperate your creditors will become and the more likely they will be to accept a settlement.

Debt settlement is one of the few options that allows you to pay all your debt for much less than the original balance. However, it can harm your credit score while these debts are being repaid and this may impact your chances of getting a mortgage or a car loan for a few years.

Credit Card Balance Transfers is a post from Pocket Your Dollars.

Source: pocketyourdollars.com