Wrong Ways Consumers Choose to Pay off Credit Card Debt

NEW YORK (MainStreet) — Paying down mounting credit card debt is not an easy task, but consumers should avoid taking on additional debt or other risky schemes where they could lose their collateral.

With the Federal Reserve planning to raise interest rates later this year, consumers should take stock of their current debt and consider paying down credit cards.

While the impact on monthly credit card payments is “pretty minimal,” it is more advantageous for consumers to pay down debt when rates are low, rather than when they are rising, says Greg McBride, CFA, Bankrate.com’s chief financial analyst.

Balance transfer offers

Many credit card companies are offering 0% balance transfers, but the number of offers will dwindle as the Fed raises rates.

“Grab those rates now while you still can,” McBride says. “As the Fed eventually moves away from a 0%, credit card issuers will do the same. Over time those offers will dissipate.”

If you decide to use a balance transfer offer, ensure that you have a plan to pay it off by the time the lower rate ends, which ranges from 12 to 18 months. Consumers who are still left with a balance could wind up shelling out more money “than if the balance had been left where it was in the first place," says Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.

“Low ‘teaser’ rates can be tempting as a way to lure a high balance from one credit card to another, but if the window on the low-interest offer is too short, the strategy may backfire if the transferred balance remains after the rate adjusts,” he says.

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