Paying off credit card debt is an uphill battle. If the majority of your minimum monthly payment is going toward interest, that makes the climb even more difficult.
Getting out from under double-digit interest rates with a zero-interest balance transfer can make a big difference, provided you understand the risks.
Consider the case of Mary Beth as she described it to me.
“I have a credit card balance of $4,500 at 18 percent interest. My FICO score is 700. I’ve been paying the minimum monthly payment for too many years, but I am determined to pay this off in the coming 12 months,” she wrote.
“Would it be wise for me to transfer this to a new Chase Slate credit card that offers zero percent interest with no fees for 15 months? Or should I keep what I have, bite the bullet and just pay it off over the next year?”
Let’s look at Mary Beth’s numbers. If you keep what you have and pay off the $4,500 at 18 percent interest over 12 months, you will make 12 payments of $413 each, for a total of about $4,950, of which $451 will be interest.
If you transfer this $4,500 balance to a 0 percent card, a quick calculation shows you will make 12 payments of $375 each, saving you that $450 in interest. That looks like a no-brainer. And if that were the only consideration, my advice would be to go with the no interest option and keep $450 in your pocket.
But there are other things to consider — the risks you’re certain to encounter.
Most balance transfer offers involve a fee for moving the balance. A typical fee is between 3 percent and 5 percent of the amount transferred. So, for example, you’d be charged $135 to $225 added to the $4,500 balance. That reduces your potential “savings” and would increase your intended monthly payment to about $388, but you would still come out ahead.
You have to think about where this balance came from in the first place. You paid for stuff with credit because you didn’t have enough money. For whatever reason, you saw a revolving balance on a credit card as a viable option. And, apparently, things got out of control. You were not determined to make wise decisions and you ended up with a big pile of high-interest credit card debt.
The biggest risk you face in doing this kind of transfer is that you’ll slip back to your old ways. First, chances are high that once paid off, you will not get rid of the old account by closing it. You’ll see that account with its new zero balance as your “rainy day” fallback.
You’ll tell yourself you will NEVER use it, never allow a balance to build up on it — never, ever again. But you will leave the account open to have just in case of an emergency. I know this because I know myself. Been there, done that.
Statistics tell us that within about two years of paying off a credit card balance but keeping the account open in case of emergency, a person will run it right back up to the max. Stuff will happen; you’ll have emergencies. That card with its big available credit limit will call your name — in such soft, sweet tones.
Another risk is that something will happen in the next 12 months that you’ll see as preventing you from making those big payments. Should something go sideways, the new credit card account with 0 percent interest will be the easiest place to make adjustments. You’ll be constantly aware that you have the option to pay only the small minimum monthly payment rather than keeping to your plan to pay the big payment each month. Or use it to make a new purchase or more.
If you go for the balance transfer option, your new bank will be delighted for you to do that, and even happier if you cannot quite get the total balance paid down to $0 within the 15 months of grace. After all, that is exactly what they are counting on happening! They’ll be cheering when they see you default on your intention to reach a $0 balance having paid zero interest. After the introductory period, the interest rate bumps back up to a more typical 18 percent, or worse.
Risk vs. reward
All this to say, it is not an easy choice. If you are totally certain you will make that intended monthly payment, come hell or high water, a zero-interest balance transfer is definitely the way to go.
The initial hit you might get on your credit score for opening the new account and closing the old one would clear itself as you reduce your debt over the year.
I can’t tell you what to do. My job is to hold a light and a mirror to help you see things clearly, to give you the information you need to make the best decision.
Whichever way you choose to go, stick with it. Understand the temptations you’ll face and determine right now that you will not give in, that you absolutely will not add a single purchase to the account and that you will never miss a payment, regardless of the sacrifice that may require.
Keep your eye on prize, and remember, I’m here cheering you on!
Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book “Debt-Proof Living.” For questions and comments, go to https://www.everydaycheapskate.com/contact/, “Ask Mary.”