Q: Today's question comes from Chris. She asks: I’m aiming to use my tax refund effectively. Should I invest it into growing my savings and checking accounts, or should I apply it towards my credit card that has a $5,000 balance? I owe over $10,000 on another card.
A: It’s no secret that credit card interest rates are quite high, averaging around 24% recently. That's a hefty amount.
Start by checking the APRs on your credit cards. Use your refund to target the card with the highest APR, while keeping up with minimum payments on the other card. This approach, known as the “avalanche method,” maximizes your efforts to reduce debt effectively.
Consider looking into a balance transfer card as a potential strategy for debt repayment. This involves moving your existing debt from a high-interest card to one with a lower rate, or even a promotional 0% rate for a limited time, usually a year. However, be aware that many cards charge a fee for transfers.
Your aim should be to eliminate the balance before the promotional period ends. After that, the interest rate might increase significantly, possibly surpassing your original card’s rate, resulting in higher charges on any remaining balance.
Before committing to a balance transfer card, read through the terms carefully and assess your financial situation. Are you able to pay off the balance within the promotional timeframe? Will the temptation of a 0% rate lead you to accumulate more debt? Compare various balance transfer options, and do the math to determine if the fees and potential rate hikes make sense.
