Eliminating Fees

How Overdraft Fees Silently Rip You Off

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How Overdraft Fees Silently Rip You Off

It’s Thursday, the day before payday. You only have $50 left in checking and have forgotten that your gym membership of $70 will be automatically debited from your account today. Normally, you’d transfer a little bit out of savings to cover the cost if you needed to, but you didn’t do it in time. The bank approved your gym’s charge and now your balance is negative $20.

Whoops, you’ve gone overdraft.

33% of Americans have gone overdraft in the last year

In a recent survey, MagnifyMoney discovered 33% of Americans have gone overdraft in the last year. If you haven’t yet, it is bound to happen at some point. Either we make a mistake, or we actually run out of money.

Going overdraft in the United States – even accidentally – is one of the most expensive ways to borrow money in the world.

  • Banks charge effective APRs > 1,000% – making them worse than payday lenders

  • Banks have purposefully made the system obscenely complex.

  • Banks regularly re-order transactions in the background, increasing the fees you pay and stacking the deck against you

The U.S. always wants to be #1…

Unfortunately, overdrafts in the US are the most expensive form of short-term borrowing I have seen in the world.  Yes – it is more expensive to borrow here than in the UK, Russia or Mexico! Banks made $32 billion last year in overdraft fees alone.  And, in our survey, borrowing $100 for 7 days could cost up to $300 in fees!

How do fees work?

In the example of the gym membership, the bank has 2 choices: approve the transaction or decline the transaction.

If they approve the transaction, then you go overdraft and will be charged an overdraft fee. The average fee is about $35 per incident.  You can be charged multiple times a day.  One of the worst examples is Citizens Bank, which charges $37 per incident, up to a shocking 7 incidents per day. I’ll save you whipping out the calculator, that’s $259 in fees for a single day!

When your account is overdrawn, the balance is negative. You have to bring the balance positive (by putting money into the account), or else you will be charged an extended overdraft fee.

At Bank of America, you would be charged another $35 if the account is negative for 5 days. And remember: you have to cover both the amount you borrowed and the fee.  In the case of the gym membership – you would have to pay the $20 you borrowed and the $35 fee in 5 days, otherwise you are charged another $35!

If the bank decides to decline the transaction, you still get charged a fee.  This fee is called an NSF fee aka non-sufficient-funds fee.  And, guess what?  The fee is still a shocking $35 per incident.

So: you are charged $35 if it is approved or declined.

Doesn’t the bank also mess with how my transactions are posted?

In a normal world, transactions that take place at 8AM will be deducted from your checking account at 8AM.  Unfortunately, the rules are stacked against you.  Rather than posting the transactions when they actually happened, a lot of banks post transactions when they wish they would have happened.

Nearly 50% of banks use what is called “high to low processing.”  They take all of your transactions from the day, and deduct them from your account from highest amount to lowest amount (and they do this at the end of the day).  That means you will go overdraft sooner, and you will pay more fees.

Imagine you have a balance of $50.  You have 2 transactions: a morning trip to Starbucks for $5, and then dinner for $55.  If the transactions were posted in order, then you would only have one overdraft transaction: the dinner for $55.

If the transactions were posted from high to low (and not in the order they happen), then you would have 2 overdraft transactions!  At an average bank, that would increase the fee from $35 to $70!

And that is perfectly legal.


Balance Transfer

MagnifyMoney Guide: Balance Transfers

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balance transfer

Let’s say you have ten thousand dollars of credit card debt at 20% interest rate, making a minimum payment of $276 per month. Your debt is generating more than $3,000 of payments in a year and $1,893 of that is simply paying interest. You keep paying and paying, but your balance barely seems to decrease because of the atrociously high interest rate.

Instead of letting the banks take advantage of you – it’s time to use that debt as an asset to make the banks compete for your business.

Okay, I am convinced. How do I get a balance transfer?

Under Compare Products, we have a Balance Transfer page. Every day we look for the best offers, and update them on our site. You just need to input how much debt you have, your current interest rate and how much you can afford to pay each month. We will then show you great deals.

You must have good credit in order to get these deals. They generally approve people above 680 and you are highly likely to be approved if you are in the 700s. Banks will generally put a limit on the total amount that you can transfer, and you will only know that number once you are approved.

The best way to reduce your rate is to:

  1. Make a list of all your debt. Write down the name of the bank, the interest rate and the balance.

  2. Start with the highest interest rate. If that debt is with Chase (for example), then choose the best balance transfer offer on our table that is not from Chase.

  3. Repeat step 2 for your other credit cards.

Remember: even if you have debt on Chase and Citi, you could open a new Chase card for your old Citi debt and a new Citi card for the old Chase debt.

Does MagnifyMoney have a favorite offer?

If you do a balance transfer and follow our rules (don’t spend and pay on time), then you will save a lot of money. A whole lot.

We usually favor 0% with no fee. But there are plenty of options out there.

If you are in between, then there are a lot of 18-month offers at 3% and a 24 month offer at 4%. Our calculator can help you understand the savings.

Can’t I just ask my bank to reduce my interest rate?

If only it was that easy.

Credit card companies are usually organized into teams. There is an Acquisition team (looking for new customers) and an Existing Customer team (looking to maximize the money made on existing customers).

Think about those incentives for a minute. The Acquisition team desperately wants new customers.  And they will do anything for that business. Like giving away a 0% offer for as long as possible. Or, in the case of rewards cards, by giving big sign-on bonuses.

The Existing Customer team wants to make money off of the customers.  So, if someone calls in and asks for an interest rate reduction, the answer will probably be no.  If it is a yes, it will never be as good as the new customer offer.

The way banks are organized actually makes the following sad statement true: banks do not reward loyalty. In fact, they do the opposite.  

There are some notable exceptions to this, but in general this has been the rule.

So, your strategy should be to always be in the honeymoon.  Just think of the relationship like a date.  On the first date, doors are being opened, champagne is flowing and everything is paid for.  Fast forward (7 years into marriage) and the situation looks different.

With balance transfers, you can live in the honeymoon until your debt is paid off!



Balance Transfer

3 Traps of a Balance Transfer and How to Protect Yourself

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View of businesspeople reaching across a table.

At 5 o’clock in the morning, you rouse yourself from bed, put on a t-shirt and old jeans, and head out to your garage. You pull all your unwanted collectables and last seasons’ clothing out of boxes and start laying them out on tables with price tags. An hour later – the local yard sale aficionados have descended upon your lawn to pilfer the things you don’t want and find some hidden treasures in your junk pile.

Balance transfers aren’t much different. In both cases, you’re trying to get rid of something you don’t want and someone else finds it valuable.

What is a balance transfer?

You may not like your credit card debt – in fact we hope you hate it – but banks love it. Why?  Debt makes the banks a lot of money. Every year, banks make billions of dollars on credit cards, so banks are constantly looking to get more of your debt.

A balance transfer is a way for them to steal your debt from the competition.

Imagine you work at Citibank.  You have a customer who has $5,000 of debt at Chase, and you want to convince that customer to move their debt from Chase to Citi.  What do you do?  You give her a great switching incentive (just like when your cable company offers you a great rate for the first 12 months of a contract).  So, you tell the customer that she can pay 0% for the next 18 months.  All that person needs to do is pay a one-time fee of 3%.

Almost all balance transfers have the following features:

  • A one-time fee:  these fees are usually between 3% – 4%.  They are charged up-front and added to the balance.

  • A promotional interest rate, usually 0%:  these promotional rates can last from as few as 6 to as many as 48 months.

How do banks make money?

So, the customer moves her debt from Chase to Citi.  Is the bank happy to be charging such a low interest rate?  Of course not!  Our Citibanker expects the customer to do one of the following:

  1. Miss a few payments.  Before the CARD Act, a single missed payment (even by 1 day) meant the bank could increase the interest rate from 0% to a punitive 30% or higher.  That is no longer allowed.  But, if you go 60 days past due, the bank can increase your rate.

  2. Spend on the card.  If you start spending on the card, then your balance won’t go down.  Even better for the bank, interest will start accruing on the money you spend right away (unless you pay off the full balance, including the balance transfer)

  3. Still have a balance at the end of the promotional offer.  If you are given 0% for 18 months, banks are betting that you will still have a balance in month 19.  And if you have been spending on your card, it could be a big balance.  From month 19, the bank will start charging a nice high interest rate and your payment goes up.

Unfortunately, a lot of people fall into these traps.  That is why banks keep offering balance transfers. But, if you are savvy, you can easily avoid all of these traps.

  1. Set up an automatic debit as soon as you get the card and complete the balance transfer.  You will never be late.

  2. Once you get the card, put it in the freezer (hypothetically of course).  Never spend on it!

  3. Make sure you have a plan for the end of the balance transfer.  If you have 0% for 18 months, then make sure you shop around for the next balance transfer in month 18 so that you don’t have to pay the high go-to interest rate.

But the bank charges a fee.  Do I really save money?

promo-balancetransfer-halfSo many people write about their fear of the balance transfer fee.  Here is a general rule: if you can pay off your debt in 6 months or less, then the fee is not worth it.  If it will take longer than 6 months, than it is almost definitely worth it.  We will do the math for you on our Balance Transfer page.  I think you will be shocked by how much you can save.

Let’s break it down: $10,000 of debt at a 20% interest rate.  You decide to do an 18 month balance transfer with a 3% fee.  So, you pay a $300 fee up-front.  That fee may sound scary ($300 is a lot of money), but, during the next 18 months, you would have paid $2,758 of interest.  You will be savings $2,458 over 18 months.

Just think about it.  Rather than giving $2,458 to the bank, you can pay off your debt so much faster!

Feel up to the challenge? Let’s walk you through how to get a balance transfer!


Building Credit

The Only Reason to Open a Store Credit Card

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 “And would you like to open a [insert store] card today to receive an extra 10% off your purchase?”

We’ve all heard this upsell strategy. Store credit cards seem to be available at just about any place you exchange currency for goods – except for maybe Seven-11.

For years I firmly shook my head and said, “thanks, I’m all set for today” without ever considering the possible advantages of opening a store card.

Then Banana Republic got me thinking about using a store card to increase my credit limit thus driving down my utilization to improve my credit score.

Why I got a store credit card: to improve my score

The moderately-expensive store was offering 40% off most of the store which could be coupled with any discount already bestowed upon sales rack items. While trying on clothes, I overheard the dressing room attendant mention if you opened up a Banana Republic credit card, you’d receive 30% off a full-priced item and an additional 10% off everything else.

Like most shoppers, I looked down at the massive stack of clothing I had my eye on I started to do the math. All those discounts could net me over $600 worth of clothing (at it’s original price) for $120. While weeding through the dresses, blouses and pants I started to do another math equation.

If I opened a store card, I would be increasing my overall credit limit. I could use the card for one purchase a month – or none – thus lowering my utilization. A utilization rate below 30% helps prove you aren’t a risky borrower and can increase your credit score. So, if my overall credit limit went from $5,000 to $8,000, and I continued to only spend about $1,200 on my cards each month, I could lower my utilization from about 25% to about 15%. Plus, establishing and using another line of credit responsibly would help improve my overall score.

The opportunity to improve my score, and maybe a little bit of the discount, convinced me to open up a store card — which now sits my hypothetical freezer.

The application process was painless and required I give certain personal information, like my address and social security number, to the cashier. Within a minute I’d been approved. Store cards are ideal for people trying to build their credit from scratch or anyone rebuilding a botched score.

Low scores get approved for store cards

You don’t need to be part of the 700-prime-score-club to get approval for store credit cards. In fact, banks approve much lower scores for store card than they would normally allow if you just walked into a local branch or applied directly for a bank credit card online.

The reason being, banks promise retailers a certain approval rate (perhaps people with a score of 550 or higher), which then requires the banks to approve customers they’d normally consider risky.

Opening a store card is an ideal way for someone with a lower credit score to begin rebuilding his or her credit.

Getting approval for the credit card increases a person’s credit limit thus driving down their utilization ratio as well as diversifying their types of credit. But it only helps if you use the card wisely – perhaps by simply tucking it away. If you do plan on using the card for affordable purchases,  it can still be used at any store – not just the one with the logo on the front.

Be careful about making purchases on a store card

Just because you have the card doesn’t mean you should be swiping it. Stores (and banks) will entice you to spend on their card by giving all sorts of promotional offers like sales, special discounts or reward points.

Don’t fall for these traps. Seriously. Seeing those promotional offers should set off alarm bells in your head – kind of like when you’re watching a horror movie and want to scream at that stupid character walking into a creepy, dark house.

Store cards have high rates, so if you get caught in a debt cycle it will not only hurt your credit score and history but also attack your wallet. Only use a store card if you’re able to pay a purchase off in full each month.

How you know your credit score is increasing

Not many people send snail mail these days, but banks still love direct mail. Once you start having a mailbox stuffed with credit card offers, you’ve been tapped into the “credit-worthy” group. The first round of mailers might be from sketchy-sounding companies, but it just means you’re on the rise.

Once your score hits a pleasing 680, you’ll be bombarded by offers from well-known credit card companies.

Know yourself and your limitations

Store cards are a simple way to increase a low credit score, but be honest with yourself before signing up. If you tend to easily succumb to sales, discount deals, and promotional offers then perhaps this will end up putting you in debt instead of improving your credit score.

Would you consider opening up a store card to help your credit score?

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Building Credit

What Makes a 700+ Credit Score?

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Three little numbers known as a credit score will determine a lot of your financial life. Credit scores help lenders assess your “risk factor” and unlike high-school girls, lenders aren’t interested in dealing with a risky bad boy. The lower your credit score, the more likely they think you are to default on a loan, make late payments or jet off to a foreign country and assume a new identity.

I first learned my credit score in a small, back-alley realtor office in New York City. My roommate and I were struggling to find a clean, safe, rodent-free apartment with an affordable price tag for two young twenty-somethings.

The realtor insisted I fork over $30 to run a credit report for my prospective landlord. After giving her my weekly food budget, I was informed I had a score in the 700s – which was apparently good enough for my landlord-to-be to deem me responsible.

At the time, I had no idea what the score meant or where it had come from.

The answer: through the diligent use of a credit card in order to establish credit history.

What goes into a credit score?

Fair Issac and Company (or FICO) – who owns the definition and scores credit – uses five different factors to assign you a credit score.

  • Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly

  • Amounts owed (30%): the more debt you have, the lower your score.  But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit –which is called utilization.  If you max out every card you have, you will get punished

  • Length of credit history (15%): the longer you’ve had credit, the better

  • New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.

  • Types of credit used (10%): the more types of credit you have, the better.  So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully

What’s a good score?

The higher your score, the better the deals you can get from banks and lenders. FICO typically calculates scores between 300 and 850. You should strive for a 700+ credit score.

Why do I want a score above 700?

A score of 700 essentially puts you in the “prime” group and open up opportunities that aren’t available to other consumers including:

  • When you buy a home, you will get the best mortgage rates

  • When you buy a car, the 0% financing from manufacturers will be yours

  • When you apply for a credit card, all of the best bonus and introductory offers will be waiting for you

  • When you apply for auto insurance, you will be considered more responsible – and get better rates

  • When you apply for a job, you will easily pass screening that regularly includes credit scoring

People in Club Prime are diligent about paying on time, use less than 30% of their available credit (also called utilization) and have at least a three to five years of credit history. They also tend to have a good mix of credit instead of just credit cards or just student loans and don’t apply for lines of credit on a regular basis.

Why am I not “prime”?

There are two common reasons for why you may not have a credit score above 700.

  1. If you’ve shunned credit or are young and just entered the workforce then you don’t have enough history to have established a high credit score.
  2. If you’ve been using more than 30% of your utilization ratio, making late payments or missing your payments entirely, and applying for new forms of credit are all factors that can keep your credit score from moving into 700 range.

Check out 6 simple steps for improving your credit score.

Don’t be discouraged by a low score

If you’ve struggled with your financial situation, don’t be discouraged by a low credit score. They are fixable. It may not be easy at first, but taking simple, actionable steps you can begin rebuilding your score and eventually become a member of Club Prime.

Do you have a story to share about credit scores? Let us know in the comment section or email us at info@magnifymoney.com.

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Won’t impact your credit score

Building Credit

3 Ways to Build Your Credit History from Scratch

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Meet Katie. Katie is a role model of financial health. She’s never overdrawn her bank account, always pays her bills on time, doesn’t carry any student loan debt and has diligently used one credit card for four years.

When Katie went to check her credit score, she discovered she was a thin file meaning her years of responsible financial behavior didn’t do much to boost her credit score. In part, Katie’s lack of diversity in her credit history could produce a thin file. Her credit card lender also might not report her card to all three credit bureaus.

Even though Katie is financially responsible, she still has to do some work to build her credit history.

Why you need credit history

If you ever plan to make a purchase you can’t buy outright in cash, such as a home, car or education, then you’re going to need a loan. Lenders want proof that you’re reliable; otherwise you may get hit with high interest rates or declined for a loan.

How do you establish (or rebuild) credit history?

To establish credit history, you need to have – you guessed it – a form of credit. Credit could come in the form of student loans, credit cards, home mortgages or a variety of other ways.

College credit cards

For young adults – especially college students – it’s relatively simple to begin creating a credit history. They can apply for a credit card (perhaps by having a parent co-sign) or take out a loan to help cover the cost of education. You can find a list by filtering for college students on our Cash Back Rewards page.

If you made it to later in your twenties with no debt, no credit cards and no loan of any kind – well congrats – but the time may have come to establish credit history.

Secured Cards

You can still open a credit card by applying for a secured card. A secured card is ideal for people who have no credit, are not students or have recently filed bankruptcy. Typically you provide a deposit (usually a few hundred dollars) and then your credit limit will be a few hundred dollars.

By simply making one purchase a month and paying it off on time and in full, you’ll begin to establish a line of credit and later be able to apply for other lines of credit and increase your “types of credit” factor in your credit score.

Store Cards

If you’re working on rebuilding credit, you can also consider applying for a store card. Banks are more likely to approve consumers with much lower scores through a store card than if the same consumer walked into the bank to apply for a credit card.

Protect your credit

Your credit history and score are huge assets to your financial health. You need to be diligent about ensuring they stay in good shape. Consider these tips the financial equivalent of eating your fruits and veggies:

  • Always pay on time – late or missed payments will cost you dearly

  • Try to keep your credit used below 30% of your available credit (ie: if your available credit is $1,000 then only spend $300)

  • If you apply for a store card to increase your credit then immediately put in the freezer (literally if you have to) and avoid spending

  • Be sure to check your credit reports for accuracy and signs of fraud – you’re entitled to one free report per year from each of the three credit bureaus

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Eliminating Fees

Calling Out the Banks: Fix the Overdraft Market

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Overdraft protection sounds like a program that would, I don’t know, protect you? Instead it helps lessen the fees but still gives banks the opportunity to charge you $10 to $12 (if not more) for transferring your money to cover an overdraft.

Understand what you’re up against

When I worked in banking, we would look at certain warning signals.  If a product is excessively complex and extracts revenue that is exponentially higher than the cost of providing the service, then something is wrong.

I believe the overdraft market in the US is fundamentally broken, and has morphed into the worst type of predatory lending.

I have a really simple solution, and banks all over the world are already doing this.

  • Declining a transaction costs banks fractions of a cent, so charging consumers a $35 decline fee is obscene.  The most they should charge is a few dollars. Some new entrants charge nothing at all – and they are right to do so.

  • An overdraft is a short-term loan.  Lets stop talking about fees, and start talking about interest rates

    • Checking accounts should have a disclosed overdraft limit.  In other words, you should know that you can go up to $500 overdraft

    • The bank should charge a fair interest rate for the money you borrow – and only for the days that you borrow the money

Some banks are reasonable when it comes to overdraft

First Direct, one of the most popular banks in the UK, offers the following:

  • Free overdraft protection up to $250

  • A line of credit above $250 (the better your credit score, the higher the available line).  The interest rate is about 15%.  You don’t pay a fee-only interest for the days that you use the credit line.  So, if you borrow $100 for 7 days, you would pay about $0.29.

  • If you use your entire overdraft line, and the bank declines additional transaction, you pay nothing.

Banks should make money.  This is not a charity.  But they should offer transparent pricing that is easy to understand and compare.  And the profit should be in line with the cost of providing the service.

Consumers should be able to compare and choose the best option – just like any other consumer product. Fortunately, we’re helping you do just that.

Banks that respect you and your money

Consider switching to an internet-only bank. I have made the switch.

If you have a few instances of going overdraft because of a simple mistake, then consider Ally Bank.  You get one of the best interest rates on the market for your savings account. And, if you go overdraft, Ally DOES NOT CHARGE YOU for transferring money from your savings account to your checking account.  Why you ask? Because, it doesn’t cost them anything to do it!

If you go overdraft because you need the money, then Capital One 360 might be right for you. This is the old ING Direct.  They act a lot like First Direct of the UK: no overdraft transfer fee, a line of credit, and you only pay interest for the days that you are overdraft.

If you never want to go overdraft again – and wish the bank would just decline your transaction and not charge you a fee, then look into Bluebird or Serve (both from Amex). Bluebird is in partnership with Wal-Mart.  You can never go overdraft, and you will never be charged an NSF fee.

Even if you love brick-and-mortar bank branches, do the math to see if switching to an internet-only bank could save you a substantial amount of money in fees – and don’t forget the cost of gas!

Want to know more about Internet banking? Check out this article.


Balance Transfer

Fire Your Bank and Cut Your Interest by 90% with a Balance Transfer

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Credit card debt is nasty business. Every month you throw your hard-earned money at your debt and yet your balance never seems to go down all. Your stagnant balance is the result of a banker’s best friend: insanely high interest rates, which he happily applies to your credit card.

High-risk means high interest

The average interest rate on a credit card is often cited at 15%, but that number is misleading. Banks can average out a lower interest rate by awarding low-risk customers (people who pay their balance in full every month) a low interest rate – often below 15%. Simultaneously, they spike the interest rate on higher-risk customers who borrow money using a credit card. Those rates are often higher than 15% and can even tip the scale towards 30%.

What does that mean in real terms?

  • You have $10,000 of credit card debt at a 20% interest rate.

  • You will have a minimum payment of approximately $276

  • Over the course of a year, you will make more than $3,000 of payments

  • $1,893 of that is interest

  • That equals an average $158 per month of interest to the bank

That high interest rate means that your hard-earned money is going into the pockets of bankers, rather than paying down your debt.

It’s no wonder that in our recent survey, 78.8% of Americans with debt believe that their interest rate is too high.

How to pay off your credit card debt

To get serious about paying down your debt, you need to keep two things in mind:

1.  Can you pay more each month towards your debt?

2.  Can you reduce the interest rate on your debt?

We know that brown-bagging lunch and cutting the daily latte habit gives you a nominal sum to throw at your debt, but the most effective way to pay down debt faster is reduce your interest rate.

(All while living below your means of course.)

In the example above, you would be spending nearly $2,000 in the next 12 months on interest.  If you could cut that rate in half, you would take years off the time to pay off that debt.

Shopping for lower interest rates doesn’t show lack of character

Just imagine you are the CFO (Finance Director) of a business.  You borrowed money to fund expansion plans.  You are currently paying 20% on that debt.  Banks are offering interest rates as low as 4%.  But you don’t do the work to get the 4% interest loan, because you think it shows a lack of character. You borrowed the money, so you need to pay it off. It is highly likely that you would have a short career as a Finance Director. You would be fired. And your replacement would immediately re-finance the debt at 4%. The money saved could then be used to pay down the debt more quickly or re-invest in the business.

You should run your family financial affairs no differently. You should be looking to keep your interest expense as low as possible. You can then use the money you save to pay down your debt faster.

In most cases, the banks aren’t rewarding you for being a loyal customer. They aren’t operating with buy-nine-get-the-tenth-one-free coupons! Instead, the longer you have had your credit card, the more likely the rate is even higher than 30%.

Before the CARD Act was implemented in 2010, banks used to participate in a fiendish little trick called repricing. With little disclosure, banks could rapidly, dramatically and legally increase your interest rates. And they did it often

Just because you accrued debt on a card with Bank A doesn’t mean you should subject yourself to their abusive interest rates.

Time to start looking at a balance transfer

At MagnifyMoney, we love balance transfers. They are the single best way to reduce the interest expense on your credit card. If used properly — and you must follow the rules– you can slash your interest expense by 90% or more.

And when we did a survey, 89.1% of Americans who did a balance transfer in the past would do one again.

Not sure what a balance transfer is or how to get one? Don’t worry, we’ll take you by the hand and explain it all.