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Why You Should Apply for a Balance Transfer Credit Card

When discussing the uses for, benefits of, and reasons behind applying for a balance transfer credit card, a little bit of context is required. So money is tight, and you have a ton of credit card debt. Boom. There’s half the scenario right there, but there’s one crucial aspect this scenario yet to be said. You have all of this debt, and you can’t handle it all that well. But on top of that, you have a credit card (or multiple cards) with a high annual percentage rate (APR).

That’s the scenario we are working with here. You have an APR, or sometimes referred to as an interest rate despite being technically different, that is simply too high, and as you struggle to make monthly payments, interest starts accruing on top of the debt you already have. In a nut shell, your credit card debt is growing, and you can’t stop it.

So this leads us to the solution and topic of this article that was mentioned earlier – apply for a balance transfer credit card. There is one basic reason for doing this, and it revolves around handling your debt more easily and stymieing the growth of interest on top of your principal debt.

Get a Lower Interest Rate & Save Money

If you didn’t know, you can transfer debt from one card to another, hence the term balance transfer. There’s only one reason for doing this, and that is to secure a lower interest rate. So I literally just mentioned that you want to stymie the growth of interest. Logically speaking, if you are having trouble covering each monthly payment, then you need a lower interest rate for this to happen. This is where balance transfer credit cards come in!

When most people apply for balance transfer credit cards, they are trying to take advantage of some variation of a 0 percent balance transfer APR offer. Typically, a card will offer 0 percent APR on any balance transfer to that card for any period ranging between 6 to 21 months. This means you don’t accrue interest on the act of a balance transfer which is really only possible when there is an introductory offer for balance transfers. In short, it costs money in interest to transfer debt from one card to another, and the recently mentioned introductory balance transfer APR of 0 percent cuts that out of the equation.

So you save money with a low cost or no cost balance transfer. Then theoretically and hopefully, you will have transferred your debt to a credit card with a lower APR. So every month, less interest will build on top of your principal balance, and you should have an easier time paying back your debt.

There are a couple of limitations to this strategy of course. Most importantly, applying for a balance transfer credit card requires a credit card application. When you apply for a credit card, you get your credit pulled which means the card issuer is evaluating your credit history. There’s a chance that you may not have the required credit history to qualify for a new card. In short, if your credit is bad, then you may get rejected, even if it might help you pay back debt!

The Benefits of Student Loan Refinancing

This day and age, a large majority of college students have incurred some form of student debt; in fact, most sources put the figure at 70 percent of college students, totaling an overall $1.4 trillion in student debt. That’s a huge number! So basically, there are tons of college kids taking out student loans for higher education.

The student debt picture is a bit of a hot topic today, mainly due to the fact that a decent number of people are not paying back, or struggling to pay back, their student loans. Well, debt isn’t a new concept, and there are plenty of measures and financial services in place to help people manage their debt.

The financial service of the day right now happens to be refinancing, and in this particular case, we’re discussing the benefits of student loan refinancing. Here are a few of the standard and common reasons for deciding to refinance your student loans.

Obtain a Lower Interest Rate

So what’s the number one reason why you would refinance your student loans? To get a better interest rate! Student loans are generally offered with two different kinds of interest rates: fixed or variable. Variable rates fluctuate with the market, but fixed rates remained fixed throughout the life of your loan. Let’s say you have a fixed rate. Ten years down the road, you may find yourself with an interest rate that doesn’t reflect the current market rate. And that’s where refinancing comes in! If you qualify for student loan refinancing (refinancing is offered by private lenders), then you can essentially trade out one or multiple student loans (both federal and private) for one single loan with a new interest rate. Depending on your creditworthiness, you can get a lower rate and save money on interest over the life of your loan.

Simplify Monthly Payments

Many students are forced to take out multiple student loans during their college career. This can lead to a confusing monthly payment situation down the road. If you have both private and federal student loans, then it can get quite tricky. You could have multiple payments due at different times of the month, and you could get either overwhelmed or just annoyed at the whole process. Well, when you refinance your student loans, you are also consolidating them into one single loan. That means one payment once a month. Sounds pretty simple!

Pay Down Multiple Forms of Debt – The Smart Way

When you have multiple debts, it can seem impossible to keep up with the minimum repayments, let alone make headway. In some cases, just $1,000 on a credit card can take almost 25 years to pay down if you are only making the minimum payments. To get ahead of your debts, you need to know how much you owe, what the minimum repayments are, and what the interest rate is. Once you know that, you can look at tackling your debts head on.

Define the Problem

Step one to crushing your debts is to define the problem. While you might know that you owe $50,000 across various loans and credit cards, this information won’t help you to get ahead. Sit down and go through all your payments until you can make yourself a list of exactly how much you owe, who you owe it to, and when they expect to be paid. Then find out the interest rates for each debt and you should end up with a list something like this:

  Owing Min. Monthly Payment Interest Rate Time to Repay
Credit Card #1 $5,000 $100 20% 9 years
Credit Card #2 $800 $25 13.25% 3 years
Car Loan $12,000 $250 7.99% 5 years
Personal Loan $10,000 $150 4.59% 7 years

 

In this example, you need to make minimum repayments of $525. Over the life of the loans you will be paying over $10,000 in interest. To shorten this term, go over your budget and see how much extra you can put towards different sources of debt. Even $100 a month could save you thousands.

Approach Repayments with your Head, Not your Heart

Now that you have defined the problem, there are a few approaches you could take. You can put a little extra into each loan, pay down the smallest balance first, or pay down the debt with the greatest interest rate first. First, consider whether a balance transfer credit card suits your needs. If you cannot find a way to lower your rates, then start tackling debt with the highest interest rate first. While you might want to start with the smaller debts, knocking down the high interest ones will save you the most money over the life of your debt.

In the above example, if you start by paying down the 20 percent APR credit card debt, you will save $3,481 and knock more than six years off of repayment. Once that card is paid, you will have another $100 a month free that you can put towards closing out your second card.

When you have paid down your credit cards, you will have approximately two years left on the car loan. Take the $225 a month from your credit card repayments and put it towards your car loan. You’ll shorten the loan by a year and save close to $300.

Finally, take $340 a month from your other loan repayments and tackle your personal loan. The increased repayments will knock two years off the life of the loan.

By snowballing your debt repayments starting with the highest interest rate, you can cut both the repayment time and the total interest paid in half. While it might seem like a daunting place to start from, every dollar makes a difference, and once you get started momentum picks up quickly. Just like in this example, the first step is the hardest, and the first debt takes the longest. Despite this, by you’ll see your debts rapidly melt away by sticking to a solid plan.

Why You Need a Budget

One of the hallmarks of being a ‘responsible adult’ is knowing where your money goes. Many people get through their lives without ever writing down a firm budget. They are comfortable knowing that slightly more money comes in than goes out, and they might be able to comfortably manage a holiday once or twice a year. However, many more people spend more than they earn. This causes problems, but this is where budgeting comes in and saves the day.

Why budget when the money is flowing?

Waiting until you are in strife to budget is like planting your crops mid-winter when starvation sets in – starting early on a budget when the weather is nicer ensures a good harvest for the year. By setting a good budget early you may find that you have more or less money than you originally thought. With a budget, you can start saving before you have goals. This will mean less waiting and less strife when you decide to pursue a big ticket item, like a mortgage deposit or a round the world extravaganza.

Budgeting: Tricky and boring?

The first hurdle you may face when budgeting is apprehension. Budgeting has a reputation for being complicated, time-consuming, and downright boring. Budgets are viewed as setting rules to deprive yourself of spending; however, it all depends on your approach. Methods like the zero-sum budget focus on giving all of your dollars a job, including saving. By making this decision to save at the start, you don’t need to hold back money ‘for savings’. Simply divert money into savings on payday and do whatever you like with the rest.

For a more detailed budget, break up what you spend into the biggest and most important categories: housing, transport, food, fun, and ‘other’.  Give yourself a rough estimate on your spending and review your efforts at the end of the month. Once you know where your money is going, you can adjust your budget (or your spending) to suit your goals. If you find too much money disappearing into the ‘other’ column, create a new column that suits you. Maybe it’s ‘travel’, maybe it’s ‘pets’, or maybe you need an entire column devoted to ‘wine.’ Your choice!

The Bottom Line

Budgeting isn’t about setting rules and sticking to them. It’s about taking control of your spending so that you can make informed choices. Tools like You Need a Budget or Pocketbook can help do the heavy lifting for you by categorizing your expenses and telling you exactly how much you saved each month; however, you do have to give them access to your bank details. For something a little more hands on, try out the Money Smart budgeting tools, or even the household budget template in Google Sheets.

Once you have a budget in place, you can start planning where to spend next. Budgeting helps you dig your head out of the sand and look to the future. Whether you’re aiming for a round the world trip, a deposit for a new home, or owning the world’s most expensive dog, having a budget puts you in control.

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