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Interest-free credit card offers appeal to many consumers as a way to reduce heavy debt on high interest credit cards. But these offers are not a panacea for your credit problems – there may be better remedies for you.
Remember that the zero percent interest on these credit cards is for a limited time only. After six months or a year, a higher interest rate kicks in, possibly higher than the cards you currently own. These cards often also have a one-off balance transfer fee, typically around 3% of the amount owed. Calculate it all before you act, or check our tool to calculate the actual cost of a balance transfer.
Plus, there’s always the risk that instead of using the promotional period to double the principal repayment owed, you’ll instead double your spending with these interest-free credit cards.
If you really want to pay down your debt and cap your extra spending, here are some other alternatives to explore:
” MORE: How to repay a debt
Home equity loan or line of credit
If you have good credit, home equity, and a stable income, a Home equity loan or home equity line of credit can be a great way to pay off credit card debt with cheaper interest rates.
These can be faster than getting a traditional bank loan, but it’s important to keep the differences between the two in mind. Home equity loans are one-time lump sum loans that are repaid at a fixed rate. Payments are higher than a Home Equity Line of Credit (HELOC) because you pay both principal and interest.
HELOCs work much more like a credit card. You have a fixed amount that you can borrow and repay as much as you want. However, you will have to pay a variable interest rate that changes with the market. Monthly payments during the initial “draw” period will only cover interest, so minimum payments will be lower.
These usually have a lower interest rate than credit cards or even a traditional bank loan. One big downside: Because these are secured loans using your home as collateral, you are now putting your home in jeopardy.
Unsecured personal loans
An unsecured personal loan from an online lender, bank or credit union may be the right option for consolidate debt if you have good credit but cannot pay off your debt during the promotional period for a 0% interest rate credit card.
Bank personal loan rates can vary widely, and banks will consider your creditworthiness and income before approving a loan.
Take a look at credit unions first. Because they’re nonprofit, they can charge lower rates than banks, and federally chartered credit union rates cap at 18%.
Online lenders cater for borrowers from good credit to bad credit. Borrowers with excellent credit will find lower rates at most banks, while borrowers bad credit can find rates as high as 36% (considered the upper limit of affordability) even through reputable lenders.
You may be able to find a lender who does not check credit at all, but expect to pay triple-digit interest rates.
Instead, you might consider get a co-signer with good credit. But you both take a risk if you default. Instead of going into debt, you could be damaging both your finances and your relationship. Or you could take some time first to work on increase your credit scores: This is not an instant fix, but it shouldn’t take years either.