Balancing balance tranfers + Debt snowball progress for May 2015

Earlier this year, I got my first balance transfer card in hopes of paying the bill in full before the 0% interest promotion ends in April 2016.

Well, I took advantage of another promotion. My main bank mailed a promotional offer to get 0% APR on balance transfers and direct deposits through November 2016. Initially, I just threw the paper aside. Then the bill for a major surgery arrived. I needed $1,800 and credit seemed like my only option. Previous medical bills had eaten most my HSA and regular savings.

balance transfer processSo I called up the bank to learn more about he offer. The representative, Denise, was so helpful. We talked for 40 minutes. She helped me understand the conditions of the promotional offer, talked about her past issues with credit and gave advice on how to repay my credit card debt.

Denise said she was trying to keep up with the Joneses in Atlanta. She was charging purses and whatnot on her credit cards to look fly. Before she knew it, she had a major problem/ Just like me, she took advantage of balance transfers with 0% APR promotions to climb out of debt.

I decided to go ahead and get a direct deposit to pay for my surgery. Denise said she knows so many people who are using credit to pay off medical expenses.

I told her about the credit cards I’m paying off. Then she asked how much interest I was paying on a store card. When I told her, she was like, “Girl, go ahead and transfer that balance to this card.” She said it doesn’t make sense to continue to pay that high interest rate, when you can use this offer to pay if off without accruing interest until November 2016.”

Then she asked if I had more questions.

“Could you lower my interest rate?”, I asked.

“I’m so glad you asked,” she replied.

It cracked me up because although I’d read about asking for interest rate reductions, I hadn’t asked in such a long time. “Clothes mouths don’t get fed on the boulevard.”

Denise lowered my interest rate on that credit card and another card, which I’ve paid in full and haven’t used since, by 3 points each. She also gave me an extra year on the promotion and

With the direct deposit, I essentially created more debt. I hate that notion, but I realize that what’s more important is that I have a decent plan to pay it off in a decent fashion.

I’ve reworked by debt snowball plan, leaving out student loans. That’s a whole ‘nother can of worms. According to my calculations, I can get out of credit card debt in a year and 2 months—so before my 30th birthday. What a gift that would be!

Debt Snowball Progress May 2015

My 29th birthday gift to me: No more credit card debt

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:

  1. emergency savings
  2. save to spend
  3. retirement

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.

BorrowerIsSlaveToLender

What to expect when doing a credit balance transfer

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.

What To Consider When Selecting A Balance Transfer Card

  • 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 Balance Transfer Screen Shot 2015-01-07 at 2.56.17 PMtransfers 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.

How Balance Transfers Affect Your Credit Score

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.

  1. 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.
  2. 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.
  3. 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.

Whats-In-Your-Credit-Score-Fico-600

Looking Forward

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!

The True Cost of Debt

debt-problemsOne 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:

  1. Interest eats up your budget
  2. Amortization is not always your friend
  3. Debt is a deterrent to saving
  4. Debt limits freedom of choice
  5. Debt delays retirement
  6. Debt has an unexpected life cycle
  7. 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.

  1. Card 1 – $577.55
  2. Card 2 – $517.68
  3. Card 3 – $346.98
  4. 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.

Word of the Day: Emcumbrance

Encumbrance2The daily horoscope in the local newspaper spoke to me today. Usually, I take everything with a grain of salt because they could be used for any other sign besides Aquarius. Anyhoo, the horoscope read: “It’s time for those material possessions that don’t serve your well to be released to someone who will put them to good use. Immediately the lack of encumbrance will make you feel younger.”

Hmm…Encumbrance. It made my nose turn up as if an odor assaulted by olfactory system. Using my context clues, I was could tell it had a negative connotation.

A quick Google search showed that encumbrance means a “burden or impediment.” Synonyms include: hindrance, obstruction, obstacle, impediment, constraint, handicap, inconvenience, nuisance, disadvantage, drawback, etc.

Yep, debt is definitely an encumbrance. All of this baggage will slow down my journey to financial prosperity. I’m going to keep this image in mind. The term could also be used to define a mortgage or other charge on property or assets.

But as far as I’m concerned, my credit card debt and student loans will be known as encumbrance. I mean—who doesn’t want to get rid of that quickly?!

Thinking of house and home

On Thursday, my coworker and I returned to the personal finance workshop. We, along with our 55-year-old classmate, shared our goals with Teacher. Our goals varied as we’re all in different stages of our lives. There’s something special about putting your goals down on paper and out in the universe. When you share them, you feel more responsible and others can hold you more accountable.

Teacher encouraged me to dig deeper – to put target dates and monthly savings amounts next to each goal. My goodness! That’s going to be tough. I don’t know what car I’d like to buy in the next two years, let alone how much it costs.

In big letters above our goals, Teacher told us to write: “Am I willing to do what it takes?”

Hmmm…

Next, we jumped into credit.

Teacher said the recommended debt-to-income (DTI) ratio should be 15 percent or less. Right now, I’m at 20 percent. Then, I learned that I had been using APR (Annual Percentage Rate) and interest rate interchangeably. Of course, they’re not the same. The APR determines the amount of interest you accrue while keeping a balance on a credit card.

She blew our minds when we reviewed the formula credit card companies use to calculate your balance. Most companies use the average daily balance method, meaning that interest is compounded based on your daily balance.

Here’s what I gathered: Credit card companies will find a way to increase your balance every month. That, in turn, increases your interest. And if you continue to pay the minimum balance, then you’ll end up paying interest on interest and never really pay down the original balance. It’s the dreaded snowball effect. That’s why it seems to take so long to make a dent in the debt.

We all started to get mad at credit card companies and ourselves for not knowing this. You gotta pay attention to the fine print. And you gotta get mad enough and know the right information in order to make changes. Teacher continues to empower us with knowledge, and I’m so grateful.

House_with_Keys2After work, I attended a first-time homebuyer’s seminar with a realtor, a lender and a woman who runs a down payment assistance program through the city.

I sat with seven or eight other black women­ – some younger than me, but most a bit older. I could tell that most of us didn’t know where to start. The realtor didn’t know where to start either when she bought her home.

She earned her real estate license and closed on her own home at the encouragement of a relative who wanted to flip houses. That plan fell through, but the realtor now shares her experience with women with similar backgrounds. The realtor’s a young, black female who grew up in the projects, didn’t have role models who owned homes and didn’t have a high-paying job. But she had good credit and prayed to God that if she was going to be in a position to lose her home in the near future, then not to let her have it at all. Interesting, right? I, also, love the fact that she bought her home before meeting her husband.

The realtor spoke candidly and let the conversation flow freely. There was no PowerPoint (although she provided a handout in the goodie bag). We just asked whatever questions were on my mind. I asked about 20.

  • What’s this acronym? What’s that acronym?
  • How do you get started? (Check your credit score, and call her.)
  • How much money should you have in the bank in order to qualify for a loan? (3.5 percent of the mortgage)
  • Which credit score do lenders consider during pre-qualification? (The middle score of the three from Experian, TransUnion and Equifax. The seminar instructors recommended using IdentityGuard.com instead of sites like CreditKarma.com.)
  • What makes up a mortgage payment? (Principle, Interest, Taxes and Insurance = PITI).

mortgage-loans

  • Why should anyone even own a home? How does it appreciate in value, especially in this current climate? (You do it for security, to own your little piece of Earth.)
  • What are all of the costs involved in owning a home? (For starters, think about your monthly mortgage payment, insurance, maintenance and landscaping.)
  • What should you housing-to-income ratio be? (No more than 30-35%.)

Many of the other ladies had similar questions. The realtor answered them all with a straightforward, Southern sensibility to which could all relate.

My parents have never talked to me about home ownership, and I always lived in an apartment, so I didn’t know the first thing about it. But I left the seminar feeling enlightened and empowered. I’m going to continue to increase the knowledge and interest I have in owning a home. Maybe it won’t happen within a year, but it’s best to start planning now.

(Great resource: Wells Fargo My FirstHome interactive learning experience)