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 Post subject: Balance transfer on credit card to save interest?
PostPosted: Wed Jun 20, 2012 5:43 pm 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
All,
I'm in a kind of unusual financial situation. I've got the following debts, and could use some advice.
CC#1: 12.9% APR, $24000 balance
CC#2: 8.9% APR, $15000 balance
Car loan: 4.9% interest, $20000 balance
My mortgage is $2200/mo at 5.9%, and we're underwater on it.

My wife and I both work, kids are grown up and out of the house. Her paycheck covers all expenses except for the above, and I'm bringing in $5600/mo after taxes. We've got a $2K emergency fund, depleted heavily (and CC balances increased to near-max) over the last 2-3 years after a variety of home and car repairs. But now it looks like everything is stable, we're sticking to a not-particularly-stringent budget (consisting of "luxuries come out of her paycheck, no credit use allowed") and over the past two months I've already been able to knock down CC#2 by $5K and anticipate zeroing it out by January while making the CC#1, car, and mortgage payments, and then should zero out CC#1 in another 12 months, and the car loan will be gone a few months after that.

The question (inspired by a Discover card offer I got this morning, having only renewed our junkmail opt-out last week) is whether it makes sense to get another credit card with a 0% rate for balance transfers for the first year/18mo/whatever, max it out with a transfer from CC#1, and then pay the min due on it while I focus on the balances actually incurring interest. By rough calculations I should save something like $1000 per $10K balance over 12 months.

My first thought is, we shouldn't get more credit because it could lead us into a deeper hole rather than helping us dig out of the one we're in. But with over $3K to point at the credit debt and having a budgetary firewall of sorts, it's tough to think of how that could happen, and saving on the interest while we pay the cards off seems like a no-brainer. Please tell me what I am overlooking?


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Wed Jun 20, 2012 7:53 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1232
Quote:
My first thought is, we shouldn't get more credit because it could lead us into a deeper hole rather than helping us dig out of the one we're in.

If this is your first reaction, then you probably haven't stopped digging the money pit.


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jun 21, 2012 8:38 am 
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Joined: Thu May 17, 2012 10:05 am
Posts: 1150
Tightwad wrote:
If this is your first reaction, then you probably haven't stopped digging the money pit.


Not sure if this is the most helpful comment.

iDude wrote:
I'm in a kind of unusual financial situation. I've got the following debts, and could use some advice.

CC#1: 12.9% APR, $24000 balance
CC#2: 8.9% APR, $15000 balance
Car loan: 4.9% interest, $20000 balance
My mortgage is $2200/mo at 5.9%, and we're underwater on it.

My wife and I both work, kids are grown up and out of the house. Her paycheck covers all expenses except for the above, and I'm bringing in $5600/mo after taxes. We've got a $2K emergency fund, depleted heavily (and CC balances increased to near-max) over the last 2-3 years after a variety of home and car repairs. But now it looks like everything is stable, we're sticking to a not-particularly-stringent budget (consisting of "luxuries come out of her paycheck, no credit use allowed") and over the past two months I've already been able to knock down CC#2 by $5K and anticipate zeroing it out by January while making the CC#1, car, and mortgage payments, and then should zero out CC#1 in another 12 months, and the car loan will be gone a few months after that.


While you may feel this is unusual you are not alone in the amount of debt or kind of debt listed. Good news is many people before you have climbed and clawed their way out. You are on the way in getting out by paying off your CC’s.

To get a clearer picture I would say we need more information:

What is your wife’s income?

Do you have any other savings or investments?

Do you have a written budget where you match your expenses to your income? Check out this thread on reducing expenses.

What is the balance on your mortgage?

Personally, I would say no to the added credit card. The temptation to spend more seems too great as evidence by the balances on your current cards.

_________________
~ Eagle


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jun 21, 2012 9:56 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1232
Quote:
Not sure if this is the most helpful comment.


It's the truth. He opened the door so I walked in.


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jun 21, 2012 5:36 pm 

Joined: Tue Jun 12, 2012 4:34 pm
Posts: 556
iDude wrote:
All,
Please tell me what I am overlooking?


A few huge things that come to mind.

(1) How much is the fee for the transfer? There's usually a one-time fee associated with balance transfers of this type, sometimes as much as 4%. So if you transfer $10k, you'd incur $400 worth of expenses, cutting your estimated $1k savings down to $600.

(2) What's the APR on the card after the timeframe on the 0% offer expires? Generally, when people take advantage of 0% offers, they do so in an attempt to pay down the debt they transfer so they can save on the interest. It sounds as if you plan on only paying the minimum while paying heavily on the other cards. If it's a high rate (and usually it is), that $1k savings that turned into only $600 savings from #1 will pretty much disappear and you'll be in the hole again.

(3) You mention in your post that the balances on the CCs are from "a variety of home and car repairs." You also mention that "we're sticking to a not-particularly-stringent budget (consisting of "luxuries come out of her paycheck, no credit use allowed")." If you're using your CCs for required items and your wife's paycheck for what you call "luxuries", I would gently suggest you reevaluate whether you think adding another credit card will actually be used to help you get out of debt. One of the best pieces of advice I've ever been given is, "When you find yourself in a hole, the first thing to do is stop digging."


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jun 21, 2012 6:11 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1167
Location: Illinois
I've just skimmed over the other answers, so if this has already been said, sorry.

Read the fine print on the balance transfer offers. In addition to the one time fee many charge, many that I have seen have a 0% rate for a set period (12 months or so) but if you do not pay it all off within that time frame, the interest reverts back to day one.


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Sat Jun 23, 2012 8:02 am 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
Eagle wrote:
While you may feel this is unusual you are not alone in the amount of debt or kind of debt listed. Good news is many people before you have climbed and clawed their way out. You are on the way in getting out by paying off your CC’s.

To get a clearer picture I would say we need more information:

What is your wife’s income?

Do you have any other savings or investments?

Do you have a written budget where you match your expenses to your income? Check out this thread on reducing expenses.

What is the balance on your mortgage?


I'm not sure how it relates to the question, but wife's income is about $2K/mo take-home (she works production not hourly/salary, so it varies and she does not get paid for time off), we've got $40K or so in IRAs and 401Ks, and the mortgage balance is ~$260K. We do have a written budget, yes, but the net of it is that my income can be used exclusively for debt reduction.

Eagle wrote:
Personally, I would say no to the added credit card. The temptation to spend more seems too great as evidence by the balances on your current cards.


Understood, thanks.


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Sat Jun 23, 2012 8:15 am 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
alohabear wrote:
iDude wrote:
All,
Please tell me what I am overlooking?


A few huge things that come to mind.

(1) How much is the fee for the transfer? There's usually a one-time fee associated with balance transfers of this type, sometimes as much as 4%. So if you transfer $10k, you'd incur $400 worth of expenses, cutting your estimated $1k savings down to $600.

(2) What's the APR on the card after the timeframe on the 0% offer expires? Generally, when people take advantage of 0% offers, they do so in an attempt to pay down the debt they transfer so they can save on the interest. It sounds as if you plan on only paying the minimum while paying heavily on the other cards. If it's a high rate (and usually it is), that $1k savings that turned into only $600 savings from #1 will pretty much disappear and you'll be in the hole again.

(3) You mention in your post that the balances on the CCs are from "a variety of home and car repairs." You also mention that "we're sticking to a not-particularly-stringent budget (consisting of "luxuries come out of her paycheck, no credit use allowed")." If you're using your CCs for required items and your wife's paycheck for what you call "luxuries", I would gently suggest you reevaluate whether you think adding another credit card will actually be used to help you get out of debt. One of the best pieces of advice I've ever been given is, "When you find yourself in a hole, the first thing to do is stop digging."


Thanks very much. While I do appreciate the other advice, this is exactly the feedback I was looking for.
(1) - Bingo. Balance transfer fee for the Discover offer is 3% of the balance transferred.
(2) - Advertised rate on the Discover offer is 11-20%. I actually got a card offer in the mail last week for 24%, and felt kind of insulted by it. My thinking was when the 0% period was running out I'd balance-transfer right back to the (now cleared) existing cards to avoid that issue, though.
(3) - Understood as well, thanks. :)


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Sat Jun 23, 2012 8:33 am 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
bpgui wrote:
I've just skimmed over the other answers, so if this has already been said, sorry.

Read the fine print on the balance transfer offers. In addition to the one time fee many charge, many that I have seen have a 0% rate for a set period (12 months or so) but if you do not pay it all off within that time frame, the interest reverts back to day one.


Another good point. I did a 0%-for-12mo loan to pay for replacement of a dead furnace, understanding exactly that issue (the rate went to something crazy like 22% and would have been another thousand or so added on), but paid it off in nine months. I've looked on this particular offer and it does not specify the interest getting charged back to day one at the end of the intro period.

And to everyone, thanks, and I'm going to wait three months (23SEPT) in the current plan at which point I expect to be below $10K balance on CC#2. If that balance is still five digits, then we take a step back and restructure how we're going about the debt reduction anyway (and it sure as hell won't include any more credit cards). If the balance is four digits, I'll probably just stay on course and won't get any more credit cards anyway.


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jan 17, 2013 12:01 pm 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
Sorry for the necro...

I've been paying the CCs down steadily, at about $2K/mo. In November I got an offer from CC#2 to do a balance transfer at 6% (plus 3% fee), so with a minor credit limit boost on that card I transferred about $12K from CC#1 (the higher-rate card) to CC#2 (the lower-rate card with the offer). I then took the opportunity to ask for and got a rate decrease from 12.9% to 8.9% on what remains on CC#1. From those two moves I will save about a thousand in interest in 2013.

Now in the mail this morning I got an offer from CC#1 to balance transfer at 0% (for one year) plus no fee. As I only have $5K left on that card right now, I can pull nearly the entire balance from CC#2 back over to CC#1, and two months from now I will not pay another dollar of credit card interest ever again (since if I maintain the last eight months' paydown rate, the balances will be zero by 2014). Another thousand or so in interest that I won't be paying.

:rock:

Thanks for the advice last year, gang, y'all were spot-on. :clap:


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jan 17, 2013 1:59 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
Just a couple of comments...

You seem to have made a lot of progress since last summer. In general I don't like the balance transfer game for many reasons. But you seem to be handling things responsibly so if you are offered something that works mathematically YOU should probably do it. (I put "you" in caps there to apply only to iDude since he has demonstrated he has the discipline to handle the extra credit. Not everyone would.)


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Thu Jan 17, 2013 11:33 pm 
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Joined: Wed Aug 15, 2012 1:19 am
Posts: 4
Location: Austin, TX
Balance transfer is quiet good as long as the interest rate is lower and you can be sure that you'll find a fantastic new account with the rates and benefits you really want. And no matter whether it's the prospect of signing up to an excellent rewards scheme or enjoying a lower interest rate - or both - you can rest assured that your new account will help you make the most of your credit card and stop worrying about the state of your finances.

[Spam removed]


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Mon Jan 21, 2013 12:35 pm 

Joined: Fri Jan 18, 2013 7:21 am
Posts: 95
Location: New York
Not much new I can add, but there are two different questions at work here -- a financial one and a psychological one.

Your math -- in which I can't find error -- shows that you *could* save a lot of money by taking the balance transfer. But psychologically, can you trust yourself to continue paying down low-interest debt before it balloons?

In 2007, I wasn't able to :(

_________________
http://debtblag.com

Track my fiscal fitness with $0.5 million in debt: http://getrichslowly.org/forum/viewtopic.php?f=11&t=61052 Latest update: As of April 16, I've paid off $21,400 in credit card debt this year (after starting with $35k)


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Tue Jan 22, 2013 3:18 am 

Joined: Tue Aug 02, 2011 7:39 am
Posts: 57
Mario wrote:
Not much new I can add, but there are two different questions at work here -- a financial one and a psychological one.

Your math -- in which I can't find error -- shows that you *could* save a lot of money by taking the balance transfer. But psychologically, can you trust yourself to continue paying down low-interest debt before it balloons?

In 2007, I wasn't able to :(


Good question, Mario. In this particular case, there's no balloon - unlike 0% loan deals and many credit card deals, I specifically looked and at the end of the 12-month 0% period the interest reverts to 8.9%, but they don't tack on the interest that would have been accrued for the whole transfer if you don't pay it down to zero by the the end of the 12-month period.

But for the sake of argument, let's say it was one of those deals. In this case, where I've got around $2500/mo to put toward debt paydown without really squeezing my budget, there are only emergencies that could really get in the way. My wife and I are both committed to the debt paydown, and make much of the milestones (the first of the two cards should be paid off in early March, and in early May we drop below 30% credit utilization, for two upcoming examples). If there were emergencies that take us from the expected nine-month payoff of the transfer, out past twelve months, I'd do another balance transfer back over to the other card prior to the interest accrual balloon.

I don't consider myself particularly disciplined with this debt paydown, to be honest - I think if you were in my situation you'd be able to do the same. I've been exceptionally lucky, that over the past three years my and my wife's incomes have both risen about 20% without a corresponding increase in expenses, so we're able to point a much heavier stream of money at our (considerable) debt without struggling. Call it supply-side debt paydown, though sometimes it almost feels like cheating compared to the very disciplined folks on this forum that do pay down debt via trimming expenses and sacrificing luxuries. :worried:


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 Post subject: Re: Balance transfer on credit card to save interest?
PostPosted: Tue Jan 22, 2013 1:38 pm 

Joined: Fri Jan 18, 2013 7:21 am
Posts: 95
Location: New York
iDude wrote:
Mario wrote:
Not much new I can add, but there are two different questions at work here -- a financial one and a psychological one.

Your math -- in which I can't find error -- shows that you *could* save a lot of money by taking the balance transfer. But psychologically, can you trust yourself to continue paying down low-interest debt before it balloons?

In 2007, I wasn't able to :(


Good question, Mario. In this particular case, there's no balloon - unlike 0% loan deals and many credit card deals, I specifically looked and at the end of the 12-month 0% period the interest reverts to 8.9%, but they don't tack on the interest that would have been accrued for the whole transfer if you don't pay it down to zero by the the end of the 12-month period.

But for the sake of argument, let's say it was one of those deals. In this case, where I've got around $2500/mo to put toward debt paydown without really squeezing my budget, there are only emergencies that could really get in the way. My wife and I are both committed to the debt paydown, and make much of the milestones (the first of the two cards should be paid off in early March, and in early May we drop below 30% credit utilization, for two upcoming examples). If there were emergencies that take us from the expected nine-month payoff of the transfer, out past twelve months, I'd do another balance transfer back over to the other card prior to the interest accrual balloon.

I don't consider myself particularly disciplined with this debt paydown, to be honest - I think if you were in my situation you'd be able to do the same. I've been exceptionally lucky, that over the past three years my and my wife's incomes have both risen about 20% without a corresponding increase in expenses, so we're able to point a much heavier stream of money at our (considerable) debt without struggling. Call it supply-side debt paydown, though sometimes it almost feels like cheating compared to the very disciplined folks on this forum that do pay down debt via trimming expenses and sacrificing luxuries. :worried:


Sorry. By balloon, I suppose I meant the rate adjustment. I was just saying that you'd want to pull your money out before the interest rate goes from 0% to some other percent.

And I'm not one to judge about discipline. The two most dramatic steps in my own debt pay-down plan (check the link in my signature if you care to see more) weren't necessarily financial decisions: I finished school (so am no longer taking on student loans) and got a decent-paying job (so have money to pay down)

_________________
http://debtblag.com

Track my fiscal fitness with $0.5 million in debt: http://getrichslowly.org/forum/viewtopic.php?f=11&t=61052 Latest update: As of April 16, I've paid off $21,400 in credit card debt this year (after starting with $35k)


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