Recently, a Reddit poster started a thread to discuss plans to deal with a $7,000 credit card balance. The poster was carrying the balance on a card that had a 0% introductory rate, which meant that he was not paying the usual high interest that is par for the course with credit card debt. However, his promotional rate was slated to end soon, and he was trying to decide how he should pay off the balance that was owed.
The poster’s goal with the thread was to figure out the best time and the best method of dealing with his credit card balance, and fortunately, he has some good options for doing so. Here’s what they are.
Be careful with cards that have promotional rates
First and foremost, it’s worth noting that when you are offered a card with a promotional rate, that rate is only going to last for a limited period of time. This is true whether you get a 0% balance transfer offer or a card with a 0% APR on purchases for a set time after account opening. The 0% promotional rate usually lasts around 12 to 15 months, although some card issuers may have a shorter 0% APR period, and others may have a longer time limit.
The problem is, once the 0% rate ends, then any remaining balance due on the card will be subject to interest at the card’s normal rate. This could mean that your rate goes from 0% to upwards of 20% overnight. When that happens, you might be able to get another 0% balance transfer card and transfer the remaining balance to it, but there’s no guarantee of that. Further, most balance transfer cards charge a fee for transferring a balance — usually around 3% to 4% of the amount. So, if you keep moving the money around, you’ll keep getting hit with extra costs.
There’s also a risk that any debt payoff efforts will stagnate if you just keep moving money around to different cards with promotional rates. That’s because moving the debt can make it feel like you are doing something productive towards becoming free of it — even though that’s not really the case.
How to pay off a card with a 0% APR deal
Despite the risks and downsides mentioned above, 0% APR cards can be a good thing. If you transfer a balance to one, you can often significantly lower your borrowing costs compared to trying to pay off a balance at a card’s standard rate, while if you get a card with a 0% APR on purchases, you can finance a purchase over time without paying interest.
The key, though, is to make a very clear plan for repayment before the promotional rate expires. There are a few ways you could do this, including:
- Paying only the minimum and then paying off the full balance in a lump sum at the end of the 0% period. The benefit of this is that you are taking advantage of the 0% rate for as long as possible. It can also give you more time to save up to pay the balance in full. However, you risk not being able to come up with the money and getting stuck with a lot of debt at a high rate.
- Making regular payments each month. This option is easier for most people who want to ensure they’ll become debt-free. If you have taken a 0% promotional deal with a credit card, you should figure out exactly how much you have to pay each month to bring the balance to $0 before the rate expires. Whatever amount you determine you need, set up automatic payments for that amount to your credit card on payday. The benefit of this approach is that it allows you to pay over time instead of scrambling to come up with the funds when the promotional rate is expiring, and it allows you to make the process automatic so you don’t miss a payment.
The right approach will depend on the specifics of your financial situation. For the Redditor in the thread, he’s already had the 0% rate for a while, so he’ll need to make either larger monthly payments or start saving aggressively to ensure he has the lump sum payment he needs so he can be debt-free before he gets stuck being charged a high rate on thousands of dollars of remaining debt.
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