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Credit card 101: What are the ways to handle credit card debt?

Credit Card Debt

If you want to clear all your credit card debt in one go, paying the minimum for each month might not be the best solution, especially when you have multiple credit card debts that are due in different time of the month.   This is the time when you should be considering about financing your debt by applying for a debt consolidation loan or balance transfer to reduce the interest rate.
What is a debt consolidation loan?
A debt consolidation loan is a type of personal loan to consolidate all your loans including credit card debt or small personal loans into one single loan.  Debt consolidation loan helps to bring all the debts together into one combined loan with one monthly payment.   
How to lower your interest rate?
Generally speaking, the APR for credit card debt is more than 23%, while the APR for debt consolidation loan is ranging from 5.5% to 12%. For example, if your credit card debt is $50,000 and your APR is 20%, the interests would be $10,000.  If you fail to settle your payment, your credit card balance will be carried forward with interests month after month until the payment is settled.
What is balance transfer?
Balance transfer is another option to lower your interest rate. Many credit card issuers in Hong Kong provide the option to consolidate your debt with a 0% APR card, which is known as balance transfer.  The concept of balance transfer is actually quite simple.  Credit card issuers would offer a limited-time 0% APR period on some of their cards.  If you applied for one and get approved, you can move your high interest debts onto the 0% APR card to save some interests.

When you have moved all your high interest balances onto the 0% APR card, those outstanding cards will be considered as paid off.  You will start to pay for the new card until the debt is settled.
3 things to keep in mind when applying for balance transfer
1.    You will need to have a good credit history in order to get a higher chance of approval on a 0% APR credit card.  
2.    You will need to pay attention on the duration of the 0% APR period.
3.    You will need to find out what is the APR after the period in case you cannot pay off the debt during the 0% APR period.
How does debt consolidation or balance transfer related to credit score?
Let say, Tony cancelled 3 of his credit cards, with a credit limit of $50,000, as soon as his debts are transferred to the new card in order to avoid impulse purchase.  The balance limit of the transferred card is $100,000 and Andy transferred $95,000 of debt to his new card.  Cancelling the old credit cards will make his credit utilization rate went up to 95% instead of as low as 38%, which might have a negative impact on his credit score.

Hence, remember to keep credit limits in mind when you decided to go for either debt consolidation or balance transfer and avoid closing old accounts after consolidation.  Don’t forget the length of credit plays a role in your credit score.  In order to avoid impulse purchase, you can consider to hide your unused credit cards in a secure place or to plan a monthly budget in your spending.

Furthermore, both debt consolidation and balance transfer are considered as new credit applications, which can also impact your credit score in a short period of time.

Last but not least, good budget and saving plans are always the key to financial freedom.  So, remember to do regular reviews on your spending and financial status to work towards financial freedom.

Wait, what about my credit?  I want my TransUnion Report & Score