Have Too Much Holiday Credit Card Debt? Do This...
Are you saddled with credit card debt? Between gifts, vacations, and celebrations, the holiday season can be an especially expensive time of year. According to TD, nearly one in four Canadians will finance part of their holiday expenses on their credit card.
If you have holiday or vacation debt, or any debt for that matter (Christmas debt, Black Friday debt, etc.), and you’d like to get rid of it as quickly as possible, we have an effective strategy for you that can save you hundreds, if not thousands in interest costs: a 12-month 0% interest-free holiday!
How Does the Interest Free Holiday Work?
You should never carry credit card debt at 19.99% or more. The most effective way to reduce your debt and its cost is to do a 0% balance transfer.
A balance transfer is simple: you get a new credit card to pay off holiday or vacation debts from old cards or loans at a much lower rate, making you debt-free faster. Of course, not all balance transfers are created equal, so you’ll have to choose wisely.
The best balance transfer deals in Canada will offer you no annual fee, 0% APR for 12 months, with a 1% balance transfer fee. You start there. Then, you surf your way to the next best balance transfer deal, and so on.
There are 4 rules you need to know before you do a balance transfer:
Rule #1: Always pay-down or move your balance transfer debt before the 0% rate expires. Your rate soars afterwards.
If you fail to pay off or transfer your debt to a new 0% deal before your low rate period ends, the bank wins. After the 0% rate expires, the interest rate typically spikes back to a 19.99%-22% APR.
Your goal should be to pay down the balance you transferred during the 0% promotional period, avoiding any interest. If you can’t, then transfer it to another balance transfer card at 0%, before the post-promotional rate comes into effect.
Rule #2: Pay at least the minimum payment – miss a payment and your rate soars.
Never, ever, ever miss the monthly payment. Ever. If you miss a payment you will lose the 0% rate, and your rate will jump to the go-to rate. If you have trouble remembering to make payments, you can use pre-authorized payments, and you’ll never be late again.
That said, use this interest-free period to try to pay more than your minimum monthly payment, since 100% of your payment goes to paying down your balance.
Rule #3: Don’t make purchases or cash advances on balance transfer cards.
Balance transfer cards offer 0% on your transferred balances, but may charge you 19.99% or more on new purchases and up to 24.99% on cash advances. Many people think it’s a 0% card on all uses, but it’s not, and the last thing you need is even more Black Friday debt.
Here’s another reason not to use balance transfer cards for purchases or cash advances: banks will divide your monthly payment equally among all your balances and it won’t allocate your payment to your high interest balances first. This is called high interest balance conservation, because it will take you longer to pay down your more expensive, high interest balances.
To avoid this, make new purchases on a separate low interest credit card, a credit card with a promotional 0% interest rate on new purchases, or a standard card – and then transfer those balances to a 0% card.
Rule #4: Choose the right credit cards to pay off holiday debt.
Whether you have high interest credit card Christmas debt, sales financing, lines of credit, or personal loans, you can give yourself a 12-month interest-free holiday with a 0% balance transfer card.
In fact, with the Canadian no annual fee MBNA Platinum Plus card, you can transfer money from your credit card to your bank account, and get the same 0% for 12 month terms, with a 1% transfer fee. You can then use those funds to pay down any higher interest debt you may have, directly from your checking account. In fact, you can use those funds at 0% for any purpose, whether you’re paying down loans, funding an RRSP, or using the funds as spending cash.
Another credit card to consider is the American Express Essential card. With this one, you’ll get six months of 1.99% APR after doing a balance transfer from another card. After that, the APR will go up to 8.99%. There’s also no annual fee.
These tips will help you pay down your holiday debts faster, cheaper and easier by consolidating all of your debts onto one card and one payment.