Millions of consumers would like to get out from under their crushing credit card debt but don't know where to start. It just might start with having the right credit card.
For example, if your debt is on a card with a very high interest rate, it will take a long time to pay off the balance. But if you can transfer that balance to a card with a lower rate, it's a little easier. If you can transfer to a card with zero percent interest for a limited time, all the better.
“The zero percent interest rate offers are not getting any better, but they're much better than they have been in the last few years,” Papadimitriou said. “Taking advantage of these offers is a no brainer, since every penny of your payment goes toward paying down your credit card debt.”
So, off the bat having the right credit card can help you pay down debt quicker, but how do you find out exactly which card is best? A credit card calculator can help. The calculator at CardHub is helpful because there's an added dimension.
When you enter your data -- the amount of debt, the interest rate and the length of time you want for the payoff -- it matches you up with the current credit card offer that will best help you reach that goal.
Using the calculator, we entered a debt amount of $6,700 at 14 percent and said we wanted to pay it off in 24 months. The calculator showed we could reach that goal by paying $322 a month. The calculator also shows that if we transferred the balance to the Slate from Chase card, we could pay it off two months earlier and save $950.
That particular card has a zero percent interest rate for 15 months and no transfer fee. Its regular rate is between 11.99 and 21.99 percent. The key factor, however is that for the first 15 months 100 percent of your payment is going to pay down the balance.
You need a good credit score
Not everyone can qualify for the card, however, because it takes a credit score of 700 or better. But that's no reason not to apply. In fact, chances are 50-50 that your credit is good enough.
“The misconception that exists here is a lot of people think, when they hear 'excellent credit,' that it doesn't include them,” Papadimitriou said. “But we have data that shows more than 50 percent of consumers have what is considered excellent credit.”
Once you've transferred your balance to a low or no interest card, you'll need at least two other credit cards. One for everyday purchases that you will pay off at the end of every billing cycle and one for an emergency purchase, which might require up to six months to pay off.
The last thing you want to do, Papadimitriou says, is mix new purchases with the balance you are paying off.
“When you do not pay a credit card in full every month you do not have a grace period,” he said. “When you don't have a grace period you pay interest on the purchase from the day you make the purchase. And that interest compounds daily.”
Paid in full
The card with everyday expenses – like gas and groceries – should be paid in full every month. If you find you are unable to pay the full amount each month, it's a sign you're living above your means and adjustments are in order.
Papadimitriou calls this method of segregating expenses on different cards the “island approach.” It should be part of your plan for getting out of debt. Trying to pay off debt without devising a plan to do so, he says, is very hard to do.
Finally, budgeting is key. Paying down debt takes a bite out of your monthly expenses so it is very important to account for every dollar and eliminate luxuries for a while.
“If everything in your life looks like a necessity and you cannot identify anything as being a luxury, then you know that there is an issue there,” Papadimitriou said.
Paying down debt is doable but rarely easy and consumers should be leery of anyone who says it is. So a final word here about so-called debt settlement companies that advertise on radio, TV and the Internet.
“There's a lot of scams out there,” Papadimitriou warned. “What these companies do, and they won't tell you this, they make you default on your credit cards. They make you make payments to them instead of the credit card company so you can accumulate a significant position. Then they go to the credit card company and offer to settle your debt for less than what you owe. The credit card company sometimes accepts those offers.”
But can you stand up to the pressure of having the credit card company's debt collectors calling you several times a day, sometimes threatening legal action? Because that's what happens.
Some people can't deal with it and cave in, promising to pay back what they owe. Meanwhile, they've already made several payments to the debt settlement company, which has collected its fee off the top. So they're actually deeper in the hole.
Better to craft a plan and a budget that allows you to pay off the debt over time. It's rarely easy but in some cases, having your debt on the right credit card can make it a little more manageable.