Saturday, December 15, 2007

More About Debt Reduction, and Balance Transfers

I realized, after the last post, that I neglected one thing that I think is pretty significant: I transferred a significant amount of my credit card debt to a 1% card. The amount I was paying in interest went from over $150/ about $10. There was a small balance on the card I transferred to, and it gathers a bit of interest. However, for reasons I'll explain below, I'm fine with that cost.

As background, I have two credit cards: I've actively used cc1 since maybe 1992 or 1993, and cc2, which I used for a balance transfer (9.9% for the life of the balance), several years ago. For a few years in the early 90s, I had a couple department store credit cards, but those had low limits and fairly low balances, and I got rid of those years ago. Even though I wasn't savvy enough in my 20s about eliminating my debt, I was savvy enough to recognize those department store interest rates were too high, and I paid those off first.

When I created my budget spreadsheet (aka The Crack Spreadsheet), I really started paying attention to how much I was paying in interest each month. My minimum payment on cc1 was over $200/month, and I really realized how slowly that debt was going to take to be paid off -- even though I was paying about 30-40% more than the minimum each month. So, having heard many stories about people simply calling their credit card, requesting a lower rate and getting one, I called Chase. They offered to lower my rate .5%. A half a point!! I was astounded. I'd expected at least 5%. I persisted and asked if they could do better, and I created a 'well, my other card offered me a 0% balance transfer' offer.

That little manipulation on my part was very enlightening. Chase told me about the 3% offer they had at the time, and also had they always had such an offer (always 5% or less) each month of the year. I spent some time on the phone with the lady, who let me pick her brain. While I couldn't transfer my existing balance to the special rate, I said "well, then I could transfer that balance to my other credit card, and then immediately back to Chase, and I could have that rate?" "Yes." Twenty minutes later and after more questions about how the balance transfer works (e.g. payments always go to the lower APR balance, so that's why it's imperative to have as small a balance as possible when making a transfer), I thanked her and then called cc2. I asked what their balance transfer rate was, and was surprised that it was 1%, for nine months. I made an extra payment to cc2, so that that balance was under $1k, and then I transferred the cc1 balance over.

Now, over $150 more of what I pay each month actually goes to paying down my principal. In January, I will call Chase and see what their current offer is, and transfer the balance back there.

Here are a few more notes on good strategies for transferring balances:

1. Know exactly when the intro rate expires. Banks plan on customers not transferring their balances when the intro rate expire. I will not be one of those people. I will be transferring the balance until it is completely gone.

2. Understand how the transfer works. Some people get so excited about the low rate, they don't know to ask about an existing balance on a credit card. Payments always go to the lower rate...until that balance is paid off in full. So, that's a recipe for disaster if you have even a $4k balance at a higher, double digit rate, and then you transfer a larger amount, and you don't re-transfer all the balance when the intro rate ends.

3. When possible, use your existing credit cards for this. Each time you apply for a credit card, your credit report gets dinged. Since I have two bank credit cards, I can just volley my balance between the two, and I won't get dinged each time (this is important to me, because I hope to be buying property in the next 1-2 years, and while my credit score is well over 750, I'm self-employed and I need everything I can have on my side).

4. Don't freak out about a potential balance transfer fee. I paid $90 for my transfer -- and since I was paying over $60 a month more in interest, that was a good cost for nine months of $10 interest. Make sure that your balance transfer fee has a cap -- mine was 3% (I think) or $90, whichever was less. If you have to pay a flat percentage, without a cap, then find another card, because you will get gouged if you're transferring a large balance to the card.

Used wisely, balance-transfering your debt can be a powerful tool. The 45 minutes or so I spent talking to cc1 and cc2 were very profitable for me, and I strongly recommend anyone with a high balance and any APR greater than 5% to research this. Start first with credit cards you already have, and if none of them offer an under 5% rate or you don't have another one, only then go for a new credit card. Call your credit card, ask what specials they have, and then ask them to fully explain them to you ("is there anything else I should know? I know I'm probably not asking all the questions I should, because I don't know what they are."), and a good rep will explain them all to you.

At this point, I figure I've saved over $1200 in interest fees so far this year. That's over $1200 more that my principal balance has been lowered!

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