Each of the last four years, the number of consumers who’ve reported spending more than in the year before has steadily risen, according to the National Foundation for Credit Counseling’s 2012 Financial Literacy Survey. On the one hand, this trend reflects the continued economic recovery. However, it also speaks to the trouble people are having letting go of housing-boom spending as well as the record debt being racked up as a result. U.S. consumers incurred $48 billion in credit card debt during 2011 alone, according to a Card Hub study, which leads us to two obvious conclusions: 1) We need to pay down what we owe and 2) We must find a way to stay out of debt moving forward.
Paying Down Debt
As far as attaining debt freedom goes, consumers have a familiar ally: free balance transfer credit cards (i.e. 0% balance transfer credit cards that do not charge balance transfer fees). These cards actually disappeared following the CARD Act’s prohibition of the tactics that allowed credit card companies to revoke consumers’ 0% introductory rates as a result of any misstep, no matter how small. And while the reason for their return remains unclear, it doesn’t really matter.
Free balance transfer cards can save you hundreds in interest by allowing you to allocate the entirety of your monthly payment toward the principal for more than a year. For example, if you’re revolving around $7,000 in credit card debt and have a 12% interest rate – as the average consumer does, according to the Federal Reserve’s most recent G19 Report – then a free balance transfer would save you more than $800 over the next 12 months if you pay $100 each month.
The best free balance transfer offer currently on the market is the No Balance Transfer Fee Slate Card from Chase. It offers 0% on both purchases and balance transfers for 15 months and obviously does not charge a balance transfer fee.
Obviously, the savings you’ll garner via use of this card depend on your monthly payments as well as how much debt you have remaining after 15 months. That’s where a credit card calculator becomes handy, especially when you consider that all 0% cards have high regular interest rates. You can’t assume that you’ll be able to transfer your remaining balance to another balance transfer card because as many people learned during the Great Recession, they’re not always there when you need them.
Staying Out of Debt
Remaining debt free hinges on developing a budget and sticking to it. Start by rank ordering your monthly expenses and cutting those that are least important until your outlay is at the amount you’ve determined you can afford to spend. In doing so, be realistic and consider your current income, not the income you had prior to the financial downturn. While it might be tempting to assume everything will go back to “normal,” if your income was at all tied to the housing bubble, it’s not going to return to pre-recession levels. After establishing a budget, you can either ask your credit card company to lower your limit to this budgeted amount or set up balance alerts.
A helpful strategy for recognizing when you are spending beyond your means is to open a credit card specifically for everyday expenses. If ever finance charges make their way onto this card’s statement, you’ll know it’s time to cut back.
Ultimately, given the cost and stress associated with debt, taking the aforementioned steps to avoid it is a small price to pay.