Buzz
Every Monday, we dive into one of your most pressing personal finance questions by consulting with a panel of financial experts. If you have a general money question or a PeFi-related topic you'd like to discuss, feel free to leave a comment or email me at [email protected].
This week's question comes from Rebecca, via email:
My husband and I are weighing the best approach to eliminate our significant credit card debt. To give you some context, I received a nice raise last September, which has helped me start paying off our two store charge cards. We expect to have them cleared by June. After that, we'd like to redirect the money I've been using for those payments toward settling our AmEx. We've been considering two options and are curious which one might work better for us.
Option 1:
Combine the amount I've been paying on the store cards with the amount my husband is paying on the AmEx each month. Instead of him paying around $700, we'd contribute a total of approximately $1000 together.
Option 2:
Look for a credit card that offers favorable balance transfer terms. Check how long the introductory interest-free period lasts, then calculate how much to transfer based on the amount I've been paying multiplied by the number of months. My husband would continue paying the same amount on the AmEx, while I would direct my payment to the new card. We’re leaning toward this option because it would increase the number of accounts we have (mine, according to Nerd Wallet, is considered poor) and raise our available credit, thus lowering our credit utilization (which is also poor).
Our AmEx carries a brutal interest rate of 26.49%, and since it’s through Macy’s, they won’t negotiate with us—trust me, we’ve tried. We're just working hard to pay it off and boost my credit score. Any advice you can offer would be greatly appreciated.
Experts share their general insights on an issue that impacts everyone differently—if you're looking for tailored advice, it's best to consult a financial planner.
Mastering the Credit Utilization Strategy
Kudos on your raise! It's an excellent step toward paying down your debt, especially as interest rates continue to climb. Janet Alvarez, Executive Editor of Wise Bread, a personal finance forum, suggests that you're right to prioritize the second option, as increasing your number of accounts will improve your credit utilization, which is the second most important factor in determining your credit score and enhance your credit. But she would go even further.
"If the new APR after the zero percent introductory period is lower than the 26% APR charged by your Amex, then it makes sense to transfer your full balance to the new card,” says Alvarez. “That’s because you'll pay less interest, both during the introductory APR period and beyond. It's a no-brainer."
Remember that there’s typically a fee associated with balance transfers, so “if the interest rate difference is only a few percentage points, the fee will essentially cancel out the savings from the new APR."
Matt Schulz, Senior Industry Analyst at CreditCards.com, shares the same view.
"As anyone who has dealt with credit card debt knows, interest can accumulate quickly, especially with high-interest cards like yours," he says. "Anything you can do to slow that growth is a smart move. And while it may seem counterintuitive to use a new credit card to pay off debt, if managed properly, it can make a significant difference."
He also offers a word of caution: Don’t use your increased credit limit and the interest-free period as an excuse to overspend.
There's Always a Catch
And “there are fees, restrictions, and deadlines that can affect how you use the card,” he says. However, you might be able to avoid the fee by shopping around. Schultz highlights that the Slate by Chase card waives the fee for transfers made within the first 60 days, though this option isn't always available. Additionally, you may not be able to transfer your full Amex balance due to the card’s limits.
Moreover, if you miss a payment by 60 days, the zero-percent offer can be canceled. Also, be sure you’re aware of the interest rate that will apply once the introductory period ends.
"Nonetheless, the reality is that a balance transfer card, if used correctly, can save you a significant amount in interest,” says Schultz. “Now is the ideal time to tackle your debt. With interest rates already at historic highs and continuing to rise, your debt will only become more expensive."
And don’t close your Amex account after paying it off, or you could risk lowering your credit utilization and, in turn, hurt your credit score.
"Just use it cautiously and avoid accumulating debt that you can't manage effectively," advises Alvarez.
That said, it’s very possible you may not be approved for a balance transfer card, especially if your credit isn’t in good standing. "It's crucial not to apply for every balance transfer card available, as this could harm their credit score even further," explains Jill Gonzalez, an analyst at WalletHub.
Before you apply, check your credit score to ensure it's at least 660. If it is, start looking for the best offers, paying close attention to the fees. Resources like WalletHub, NerdWallet, and CreditCards.com have plenty of information on top balance transfer options.
"If they’re unable to qualify for a balance transfer card, they should focus on paying off the Amex debt according to option one as soon as possible to rebuild their credit," suggests Gonzalez.
