Let's be honest, America is having a credit card debt crisis. We, as a nation, are $11.4 trillion in debt to credit card companies. With fees and interest rates, it can often be difficult to climb out of the hole of credit card debt we created.
Luckily, there is a very easy solution to stop paying all of that interest to the credit card companies, and it comes from the most unlikely source ... the credit card companies.
How to Avoid Paying Interest on Credit Card Debt
We've all heard of balance transfer credit cards, but a surprising number of people don't have any idea how a balance transfer credit card works. That's unfortunate, since these credit cards can be the answer to your credit card debt issues.
Balance transfer credit cards allow you to transfer your existing credit card balance to a new card. Why would you want to do that? Usually, to lower the interest rate that you are paying on your current credit card. Many balance transfer credit cards offer lower interest rates, meaning you will be charged less interest on your balance.
How Interest Works
Interest is a foreign concept to many people. We know it exists and we know we are being charged, but we are usually clueless as to how much and how interest works. Here's a quick breakdown of how you are charged interest:
What is interest charged on?: Credit cards only charge you interest on outstanding balances. So, if you pay your credit card bill entirely every month, you will not be charged interest.
How often is interest charged?: The first thing to keep in mind is that each credit card company can calculate interest differently based on time. Most calculate interest by the day using your APR, so during months with 31 days, you will be charged more interest.
What's an APR?: Credit cards charge an APR, or annual percentage rate, which is your annual interest rate. The banks use this to determine how much interest to charge you if you haven't paid your bill in full at the end of your billing cycle. Most credit card APRs range from 12 percent to 22 percent, with very few being lower or higher. Your APR will depend on your credit worthiness.
What is ADB?: Your average daily balance is what the banks will apply your APR to when charging interest. To figure out your average daily balance, add up all your balances from each day of your billing cycle, and then divide by the number of days in that billing cycle. For example in a month with 30 days, if you started the billing cycle with $1,000, but halfway through bought something for $1,000, you ADB would be $1,500. ($1,000 for 15 days + $2,000 for 15 days, divided by 30 days.) Reader tip: This means, if you can pay down your balance halfway through the month, it will lower the amount of interest you are charged.
How to Use a Balance Transfer Credit Card
Transferring your credit card balance to a new balance transfer credit card is easier than you would think. When preparing to transfer a balance, you should also look for cards that offer the best deals for transferring a balance.
How to transfer a balance: It really is easy. Just apply for a balance transfer credit card, get approved, and then contact the bank, either via phone or online, to start the transfer. Just make sure you have the account information and bank name for the previous card, along with the amount that you want to transfer. The bank will take care of the rest.
Credit cards with 0% APRs for balance transfers: These are the cards that you need to be looking for. Some cards will offer a 0% APR for the first year or so on balance transfers. That means you pay no interest on your balance, which can save you a lot of money. Right now, the Discover it card is offering a 0% APR on balance transfer for the first 14 months as well as some cash back perks, which is a great combo.
Watch out for fees: Even if you can't qualify for a 0% APR card, you should still look for a card with a lower interest rate than the one you pay now. The one thing to look out for is fees. Cards generally charge a fee for a balance transfer. If the fee ends up charging more than you would be paying with your current interest rate, it might not be worth it to transfer the balance.
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