NEW YORK (MainStreet) It might sound counterintuitive, but one of the best ways to get out of debt might be to take on more credit. Zero-interest credit cards can save you hundreds or even thousands of dollars. But you have to do it the right way or you might end up even further under water.
Should You Transfer Your Balance to a Zero-Interest Credit Card?
The answer to that question depends on what kind of debt you have, according to Erik Larson, founder of NextAdvisor.com, a website that helps people to more effectively manage credit cards and debt.
"If you have an interest rate of 15 to 20%, that can be hard to ever get out of, unless you're making big payments," he explains. In this case, getting rid of your interest payments for a year or even a year and a half is a no-brainer. Or is it?
An Alternative Perspective
"People can be very well intentioned," says Gail Cunningham, vice president of membership and public relations with the National Foundation for Credit Counseling. With regard to using a zero-interest credit card, consumers generally aspire to two things, says Cunningham: first, they want to pay off the balance before the introductory period runs out. Second, they don't want to put any new charges on the card.
Few, however, are able to live up to these goals. "You start listening to that little voice in your head that says 'Well, I can just charge a little, especially since the interest rate is so low,'" Cunningham said. When all is said and done, the consumer ends up with more credit card debt than he had at the beginning.
The reason is that transferring your balance over doesn't address the issue that got you into debt in the first place. "People with a lot of debt are often living lifestyles that their incomes can't support," she explains.
This is something that you need to address as part of an overall solution.
"If you're a disciplined person, you might be a great candidate for a zero-interest card," she says. "But you need to be honest with yourself and not cut yourself any slack."
Going Forward With a Zero Interest Card
Even Larson, a proponent of this method, concedes that they are only part of the plan. Still, if you decide to go through with it, you're going to need to do it the right way.
It starts with picking the right card to transfer your balance onto. NextAdvisor features a balance transfer calculator. You want to pick one that not only has the longest introductory zero interest rate card, you also want to make sure that there is no balance transfer fee and that interest does not retroactively apply to your entire balance once the zero interest rate expires.
It also helps to find a card that has a low interest rate once the introductory rate expires.
"If you know that it's going to take you longer than the introductory period, you want something with a low rate," says Larson, who also says that you should absolutely try to pay the card off during the introductory time period.
If you haven't, however, it might not be the end of the world. For example, let's say that you transferred over $10,000 in debt and paid off $6,000 of it in 18 months. The remaining $4,000 can be transferred over to a new zero interest card, provided that you made your payments on time and otherwise preserved your good credit. It's not the type of thing that you want to do in perpetuity, but if you have a lot of debt on high interest cards, it can be a way to make the debt more manageable and pay it off quicker.
One final piece of advice: according to Larson, you should keep the cards you use to get out of debt in this way open. "Having that credit available but not using it helps to leverage your credit-to-debt ratio."
In the long run, this might be the best thing you've ever done with your credit.
Written by Nicholas Pell for MainStreet