Would a Credit Card Balance Transfer Help? 

A reader wonders if California resident who is overspending could be helped with a credit card balance transfer.

Q:  I read your interesting article recently about the homeowner being in a rough spot after moving to Sonoma County, California and taking on debt. I assume the $30,000 debt the reader took on was all credit card debt.

One idea I had, that you did not mention, is for that person to see if she was eligible for a transfer of that debt to a zero-interest or low-interest credit card. If she could transfer her balance to a card that offered a zero-interest term of 12,18, or 24 months, she could save herself about $9,000 a year, especially if her current interest rate on her debt was around 30 percent.

Saving $9,000 would surely help her financial situation.

Close Credit Cards Before Buying Home?

A: You’ve got the right idea. Swapping high interest debt for something carrying a much lower interest rate is a savvy move – if you can do it. Not everyone can.

The key to the reader’s problem was figuring out how to stop spending money. The reader had pocketed around $50,000 in cash after selling a home. She wanted to save that money so she could buy a different home. But, she wound up spending all of that plus an additional $30,000. And, she couldn’t really account for the $80,000 she spent.

Your solution would potentially save the reader thousands of dollars. But to really benefit, she’d have to apply those savings to pay down her debt faster.

One additional note: zero percent credit card offers usually go out to people with great credit scores. We suspect that our reader may have hurt their credit score by running up a significant amount of debt. She may not be eligible for a zero or low-rate offer.

One way to maintain a great credit score is to keep a low credit utilization rate. If you have several credit cards and the combined available credit limit on those cards is $30,000 and you carry $30,000 on those cards, you are fully (or 100%) utilizing your credit. When this occurs, the credit reporting bureaus’ credit ranking systems lower your credit score. You’re deemed a worse risk for default.

Optimally, you should max out your credit utilization at 30 percent. So if your maximum available credit limit is $30,000 on a single card, you shouldn’t carry more than $10,000 in debt on that card.

Clearly, our reader could benefit from a balance transfer. But first she has to figure out how to stop the spend. 

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