A co-worker read a poignant quote yesterday.
Do one thing every day that scares you. – Eleanor Roosevelt
Well, I did something very scary today. I am trying to transfer $3,000 from two credit cards onto one with a 0-percent interest rate for 15 months. Meaning that I’ll have to stick to my Debt Dash/Snowball plan and budget to the T in order to pay this off by March 2016.
I’M FREAKING OUT!!!
Why did I agree to transfer that much?! Why didn’t I give myself breathing room and put $2,500 on the card? That $500 makes a difference.
According to my plan, I can pay off the transfer by February 2016. That’s just a month ahead of the introductory fee and the month of my 29th birthday.
So my 27-year-old self is making a pledge to my 29-year-old self that I will not burden her with high-interest credit card debt. She will most likely have student loan debt. We’ll continue the snowball to get rid of that eventually.
But in 14 months, I want to be out of this hole.
It takes a lot of will, discipline, courage and help to slay the debt monster. But it can be done. – Dave Ramsey
I will continue to freelance and use half of that money for debt. That will expedite the process.
I just received my first payment of 2015 for a freelance piece and was unsure of what to do with it. Perhaps, I’d try the three savings buckets system and split it equally for:
- emergency savings
- save to spend
But, no. I’ve got to use part of this freelance income to hit this balance transfer. Every little bit counts. It’s not cute to continue to be the slave to the lender.
The rich rule over the poor, and the borrower is slave to the lender. – Proverbs 22:7
I’ve scared myself straight. I must make sacrifices to achieve this goal. My 29-year-old self deserves to be free of credit card debt.
I’ve heard of balance transfers for a while now, but have been wary of doing one. This basically allows you to get a new credit card to pay off the old one. The key is getting a new card with a low- or zero-percent introductory interest rate over those months, for example 6 or 12 months, so you’re putting money toward your balance, not the pesky interest. It can help you get out of debt quicker and save money overall.
Strategize Before Getting a Balance Transfer
While listening to Ready For Zero’s MoneyBuzz podcast, a co-hostess talked about how she once got a balance transfer card but didn’t create a strategy to pay off her balance before the introductory period expired. She got hit by interest twice. Boom!
Years later, she ended up using another balance transfer to pay off that debt within the allotted time period. The plan made the difference. She knew exactly how much to pay each month to avoid interest. Hearing her success story made me seriously consider doing a balance transfer for the first time.
- Purchase Annual Percentage Rate (APR) | Of course, you hope to qualify for a card at 0 percent.
- Balance transfer APR | 0 percent, please!
- The expiration date for the teaser rate | It could be 6 months, 12 months or longer. You don’t want to get caught up and not pay your balance within 6 months. You have to be careful. After the 6 or 12 months are up, the interest rate jumps up significantly. A card I considered chose between 12.99% and 22.99% depending on the card applicant’s creditworthiness. Obviously, you don’t want to have a balance and get hit with those high interest rates…AGAIN.
- Balance transfer fee | Some cards charge a percentage, for example 3 percent, of the balance you wish to transfer to the new card. So you would be charged a balance transfer fee of $3 for a card with a $100 balance.
While looking around, I noticed that you can’t get do a balance transfer within the same company. So example, you can’t dump debt from one Company A card to a second Company A card.
I ended up getting a card that offered 0 percent interest on new purchases AND balance transfers for the first 15 billing cycles of my account. Also, there was no fee for balance transfers within the first 60 days of opening the account. I qualified for the lowest APR after the 15-month teaser period. Thanks, good credit score! The company approved a full transfers from one card and a partial transfer from another. Using this balance transfer calculator, I estimated that I could save $762 in interest over the duration of the promotion. After the promotional period, I could save about $19 each month.
I called the company to better understand how this will all work.
- Balance transfers help consolidate payments. Depending on your situation, you can make one payment for two cards.
- My old companies will receive payments from the new cards, so they won’t necessarily know that I made a balance transfer. It’s as if I paid the cards in full.
- The balance transfer could have a negative impact on my credit score temporarily.
If you plan to apply for credit like a loan or mortgage in the near future, then some folks advise against doing a balance transfer. Why? A balance transfer could negatively impact my credit score in three ways.
- Debt utilization (30 percent of my FICO score) | I’ll basically max out the balance transfer card. The rule of thumb is to use 30 percent or less of a card’s credit limit. That’s not good.
- Opening new credit (10 percent of my FICO score) | Opening new accounts could lower my score. Lenders don’t want to see that you apply for new credit often. That’s risky.
- Length of credit history (10 percent of my FICO score) | The longer I’ve had a card, the better.
It’s a good thing I don’t plan on applying for anything soon.
I’m going to continue to use the Debt Dash/snowball method to pay down these two cards using the balance transfer. It’s great that my cash will go toward the balance instead of interest. Cheers to the interest-free future!
One of my favorite personal finance blogs is The Simple Dollar. You could spend hours on that site gaining insight from its contributors and learning from their experiences. A post on Dec. 5 reiterates the true cost of debt.
Doug Hoyes wrote:
- Interest eats up your budget
- Amortization is not always your friend
- Debt is a deterrent to saving
- Debt limits freedom of choice
- Debt delays retirement
- Debt has an unexpected life cycle
- Debt strains marriage
He wrote: “Simply put, debt is complicated. Yes, you will pay interest — but you will pay much more.
- Debt grows faster than you expect.
- Debt takes longer to pay off than you expect.
- Debt adds risk when life throws an unexpected curveball.”
I couldn’t agree with Doug more, especially about interest eating up my budget. It has cost me to delay moving to another city or to give up trips. As a little exercise, I totaled up the interest charged on four credit cards, one of which I paid off, in 2014.
- Card 1 – $577.55
- Card 2 – $517.68
- Card 3 – $346.98
- Card 4 – $53.25
Grand total: $1,495.46.
Yep. That’s a sizable emergency fund. A great vacation to a beach locale. A nice Roth IRA deposit. ARGH!!!
The numbers don’t lie. They’re telling me that I dug myself a deep hole, and I must climb out of it ASAP.