Typical credit cards charge an annual interest (AIR) of 19.99% or higher, which is a high price to pay for a balance on a card. And compound interest — interest charged on your interest — can have a snowball effect on your outstanding debt. Here’s how to avoid high interest charges on your credit cards.
Credit Card Interest: What’s the Problem?
If you never miss a payment or have a balance on your credit card, the card interest will not affect you. But if you occasionally need extra time to pay off your debt, credit card interest is a big and aggravating deal.
Let’s look at a simple example to better understand compound interest. Imagine you owe $10 and your interest rate is 20% per month. After one month, you owe $12 ($10 in principle and $2 in interest). The following month, 20% of the $12 total will be charged, which would cost $2.40. That would bring your balance to $14.40. As you can see, the debt piles up quickly which can really hinder your ability to pay it off on time.
An Easy Solution to Credit Card Debt: A Low Interest Balance Transfer Credit Card
There are plenty of books that describe ways to deal with debt, but before opening your reading app, consider this simple tactic: Use a balance transfer credit card with a lower interest rate. For example, the MBNA True Line Mastercard offers a promotion for new cardholders: it carries a 0% interest on balance for 12 months, and after that it charges a significantly lower than average 12.99% interest on purchases and balance transfers (and 24.99 % on cash advances). Let’s take a closer look at that.
What should you pay attention to with a credit card for balance transfer?
One strategy for reducing debt is the balance transfer, where you move debt (your balance) from a higher-interest credit card to a lower-interest credit card. The terms of a balance transfer vary, so you need to consider the interest rate, timeline, and transaction costs.
The MBNA True Line Mastercard has a balance transfer offer of 0% interest (the rate) for 12 months (the timeline) with a transaction fee of 3% (minimum $7.50). This means that when you move your balance to the True Line, you have an entire year to reduce or pay off your debt without interest (and compound interest) getting in the way. The 3% transaction fee is a one-time fee to make the switch and is based on the amount you transfer.
How do low interest rates work?
Using a low-interest credit card will lower your interest charges and also pay less compound interest.
Here’s the difference in interest payments between a typical card with a 19.99% AIR and one with a 12.99% AIR. For this example, we’ve used a $1,000 credit card balance, including compound interest, and assuming no payments have been made and no further charges are added:
This post How to lower your credit card interest was original published at “https://www.moneysense.ca/spend/credit-cards/how-to-lower-your-credit-card-interest-rate/”