Interest Rates Are Getting Crazy

How can people get out of debt while the credit card companies charge 24.99% or more? It is crazy. I was looking at this Bank Rate Credit Card Calculator and calculated that a $5,000 credit card debt at 24% will cost you dearly.

Paying $125 a month it will take you 586 months to be rid of your debt. In that time, you will pay $18,812.72 in interest.

Now the big question is, would it be wise to surf a high interest rate to a low interest rate card through a balance transfer? Well, it depends on a few factors. The problem with opening another low rate credit card is the increase of available credit.

If you transfer your high interest rate balance to the new one, your old one now has a zero balance. If you charge that card back up again, you are in a worse situation than you were before.

Getting the best balance transfer credit cards can be a good idea, if done with wisdom and discipline. Cancel the old card right after the balance transfers over.

Also, don’t delay paying it just because you have 0% for a time. One little mistake, one little late payment will make your 0% disappear right before your eyes and you will wish you had been paying more on it.

Do NOT use your balance transfer card for any new purchases. Some cards will give you 0% on balance transfers but will charge you an arm and a leg for interest on new purchases.

Don’t be under the impression that you can charge something on it and pay it off that month. The way the credit card companies pay off your balance is lowest interest rate to highest.

So you will have to pay off your entire 0% balance before they will apply any money to your higher interest rate purchase.

Sometimes not moving your balance to a lower rate is a good thing. Why? Because paying that interest makes you angry and uncomfortable. That in turn, makes you want to pay it off faster and keeps a fire lit under you. You don’t want to make being in debt comfortable.


5 Comments so far

  1. Tony Motes on June 3rd, 2008

    Thanks Amy for explaining to everyone the dangers of credit cards…I’ve lived without them for 3 years, and guess what? we have money! Imagine that….It also helps that we’re debt free except the house. I lead Financial Peace University at my church. Been on the Dave Ramsey plan going on 3 years.Enjoy your website, and wish you the best as you eliminate the debt in your life……

    Tony

  2. Brian on June 6th, 2008

    Credit cards have really been one of my biggest vices since college. Now, ten years after college, I’m still paying the piper. It’s truly legal slavery and the fact that they can just up your rate at any time and are not bound by the fluctuations in the prime rate is just ludacris.

    Haveing one around for emergencies is important but keep it out of your wallet!

  3. Harland on June 18th, 2008

    Great advice Amy.

    A few things. The 0% transfer teaser used to be better because there used to be a maximum of $50 or $75 for the finance fee, now it’s 3% for the maximum amount. So a transfer of $10K the fee used to be only $50 or $75 and now it’s $300.

    And here is a tip to remember to pay the bills on time. You can set up a monthly recurring payment in most online banks.

    Also in both yahoo email and google email there are reminders in the calendar section. I personally like yahoo because you can set 2 reminders (I usually set it 3 days and 1 day before the event). Once set the reminder will automatically send you an email for the date you set. You can set the reminders for one time or daily, weekly, monthly, yearly, etc.

    To make sure your automatic payment was sent you can set the calendar to remind you every month to check your online bank. And say the the 0% teaser runs out February 2009 then you can set up a one time reminder in late January 2009 to tell you to pay off the card.

  4. Molto Denaro on July 20th, 2008

    I’ve been tempted to get a credit card that offers cash back so that I can get some cash back when I purchase things but I plan to immediately pay it back after my purchase.

    However I don’t know how they are when it comes to paying back, my current credit card which I hardly use used to only allow me to pay on that EXACT date, if I tried to pay earlier then a $12 fee was attached to it.

    Anybody have any experiences with cash-back credit cards?

  5. Debt Free Hispanic on August 25th, 2008

    Interest does not make sense, i’d rather put my money in a mutual fund making 8%-9% so I get a greater return. People are going the opposite way financially. Thanks Amy for explaining.

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