We start this month with a new topic: Financial Planning. Remember, you can post your questions to our website and we'll try and get them answered. To get us started, the first question comes from Janice, who asks:
"I have several credit cards, one of which has a ridiculous interest rate (29.9%). My monthly payments seem to do little to my available credit. I'm at my wits end as to how I pay it off without taking out a loan. Should I transfer my balance to another card with a lower interest rate?
To help answer Janice's Question we have Rob Lyster, a financial advisor with Bankoh Investment Services a subsidiary of Bank Of Hawaii
Many folks struggle with this same issue. In fact this question is a very important part of a sound long term financial plan. Good news is there are many strategies to help folks with this; it all depends on their unique situation.
What are some of the strategies that you would advise people consider?
The first thing I advise folks to do is not carry any credit card debt and try to pay it off each month. But if folks find themselves carrying a balance they should try to avoid paying only the minimum payment. The minimum payment is mostly interest and it barely, if at all, touches the balance. You could end up paying a boatload more in interest, even more than the original balance. The more you pay to the balance the faster you pay off your cards.
Here is a story that may illustrate this. I love watching sports and I love watching them on the biggest and baddest TV with all the bells and whistles, even if I do not know what those bells and whistles do. So I decide to buy that TV with my credit card. I put fifteen hundred on the card and plan on paying the bugger off over time. Well, my card charges 29% interest and my minimum is only $37 bucks a month. If I only pay the minimum it will take me over 13years before its pau and I would end up paying over $6,000 for that TV. Now that's a boatload of interest.
Any other strategies?
You can transfer balances to a lower interest card but there are some things you may wish to consider before doing this.
1.The only way for this strategy to work is if you are able to pay more than the minimum payment
2. Check to see if the card you wish to transfer your balance to charges a balance transfer fee. This fee is normally a percentage of your transfer balance and is usually added to the balance transferred. This may just compound the challenge of paying it off.
3. Check for any balance transfer promotions, many cards run this promo quite often. These promos normally give you an initial period of low or no interest then they convert back to normal balance transfer rates. If you can pay off the balance before that initial period is over you will experience major savings on your interest.
What about consolidation loans?
If you are able to get a fixed-rate loan you will be able to budget for the payment because you will know exactly what you will pay each month and when it will be pau. Sometimes the payment you will make will be lower than what you are currently paying on your credit cards. If you do see this you may consider using that extra money to pay down this loan faster. Better yet, if you can get an equity line or loan then you tend to get the lowest rates and you may qualify for tax deductions which would lower your total cost for the loan.