Time is not on your side when it comes to credit debt

Ann Carrns
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The decorations have been put away, and mailboxes are now filling with credit card bills instead of holiday cards.

If you binged on gifts and entertainment in December and your card balances are higher than you were expecting, it's important to make a plan to pay down the debt as quickly as possible, credit experts say.

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"Don't put those bills aside, thinking they'll look better if you come back to them later," said Bruce McClary, spokesman for the National Foundation for Credit Counseling. When it comes to paying down high-interest card debt, he said, "time is not your friend."

If you have sound credit but got a bit carried away with year-end spending, you may want to consider transferring your balances to a low-interest credit card. Zero percent balance transfer offers allow you to affordably pay the debt over time, and some cards are offering people with healthy credit scores terms as long as 12 to 21 months, said Nick Clements, a co-founder of MagnifyMoney.

The catch, he said, is that consumers must be disciplined and make the payments on time, or they risk losing the promotional offer. That means they will be back to paying double-digit interest rates. Also, he said, try to find a card that doesn't charge a transfer fee, which often is 3 to 4 percent of the balance being transferred.

If you have a large balance, you may not be able to transfer the full amount, depending on the new card's credit limit. But, he noted, you can save money by transferring even part of the debt to a 0 percent card.

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Another option that is becoming more common, Mr. Clements said, is a personal loan, often made by online lenders or, increasingly, traditional banks. The loans are unsecured, just like the debt from a credit card, but they have a fixed repayment term — typically three to five years.

Some lenders will make loans for larger amounts, and interest rates can be as low as 5 or 6 percent for borrowers with good credit.

But Mr. Clements cautioned that the loans might have upfront fees and, because they are fixed-term loans, borrowers must make uniform monthly payments. Borrowers can't fall back on making low "minimum" payments, as they can with a credit card if money gets tight. "That flexibility goes away," he said.

Also, rates will be higher for those with less-than-stellar credit. So you will need to compare the rate on your card with the loan rate to see if you will actually save money. Often, he said, borrowers can check their potential rate without having the inquiry affect their credit report.

To help keep card balances from getting out of hand in the first place, Julie Pukas, head of United States bank card and merchant services at TD Bank, suggests that cardholders make use of text or email alerts to notify them when their spending is approaching their credit limit, when their balance reaches a certain limit or when a payment is due.

"They can help get control of their accounts just by receiving reminders," she said.

Ms. Pukas also suggested that cardholders using rewards programs check to see if they can receive their points or cash-back rewards as a credit on their card statement to help pay down their balance.

Bill Hardekopf, the chief executive of, recommended that consumers try making micropayments over the course of a month, rather than waiting until the account due date to make a lump-sum payment. If you have extra cash, you can make a payment at any time and reduce the interest you will pay if you carry a balance, he said.

Whole Foods cashier Jason Ellsworth rings up groceries.
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Here are some questions and answers about paying off credit cards:

What credit cards currently offer 0 percent interest without a transfer fee?

Chase Slate offers 15 months at 0 percent without a transfer fee, and some credit unions offer 12 months with no transfer fee, Mr. Clements said.

Other cards have relatively low balance transfer fees of 3 percent and lengthy terms: Citibank's Simplicity card offers 21 months, and Discover It offers 18 months.

What is the best way to pay off multiple credit cards?

One way is to list all your cards, in order of highest interest rate to lowest, regardless of the balance. You put all of your extra cash toward paying down the first card balance, then move down the list until all are paid off. (You must continue making at least the minimum monthly payment on all the cards, to keep them in good standing.) The thinking with this ladder method is that paying off the most costly debt first saves you money.

But some consumers with multiple cards may do better paying off the smallest balance first. Most people don't even know what the interest rates are on their various cards (the average consumer has four), and the rates on cards held by a single consumer tend to be similar, since they are based on one's credit score, said Remi Trudel, assistant professor of marketing at the Questrom School of Business at Boston University.

He and several colleagues recently published a study suggesting that paying off the card with the smallest debt first provides a feeling of accomplishment and encourages consumers to keep going and pay off more debt. "It's more motivating," he said.

Once I pay off a card balance, should I close the account?

Ms. Pukas of TD Bank says she generally doesn't recommend closing card accounts, since doing so may actually harm your credit score. (Closing an account can affect your utilization score, a measure of how much credit you have available.)

Rather, she suggests putting the card aside in a drawer for safekeeping.

This piece originally appeared in The New York Times.

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