Since we are spending some time really working on tips and tricks to help pay off the credit card debts faster, we want to talk about this next issue – Balance Transfers.
You may receive those offers in the mail quite regularly encouraging you to take advantage of the next latest and greatest 0.00% interest rate to pay off your credit cards and debts.
The temptation is to immediately jump on board and avoid those hefty interest fees. And we are all about finding ways to pay off your debts quickly. But we want you to consider some things and find out if this is the right way for you to go with your debt pay-off goals.
We’ve had a few successes as well as plenty of mistakes in the world of paying off debts. We’ve shared how the crash diet approach set us up for complete debt payoff failure and how we finally created the 2×2 plan that actually was the debt crushing success.
Well, in our past, we have used balance transfers and learned a few things along that way that may have changed our approach. As we’ve mentioned, we have a PhD in the school of hard knocks in the area of finances. That’s why we started this site – yes, we share a whole plethora of frugal living ideas, but the heart of it is helping you be in a better financial situation and becoming debt-free! That is our passion here.
So with that, let’s talk about the ins and outs of balance transfers and help you decide if this is a good way for you to go with your current debts.
Cons/Things to Consider That Might Be Against You
1. Your credit can be negatively damaged
If you currently have quite a debt load or have quite a bit of credit out there, we understand that you want to find ways to reduce your interest rates. But applying for another card could have quite the negative impact on your credit. Having good credit is important for more than just getting more credit. Consider the consequences of more negative marks on your credit and a lower credit score.
2. What are the terms of the 0.00% interest rate load/credit card you are looking at?
Is it for 6 months? 12 months? 18 months? etc. and do you have a clear game plan and goals for how to pay off the whole transfer amount before the 0.00% interest rate increases to the normal rate?
3. What will the 0.00% credit card/credit line cost you?
What we mean is….if it is another credit card, is there an annual fee? Is there a balance transfer fee? Often times, these fees are 1-5% of the balance or flat rates and they can be $150-$200 on up! This balance is “added” to the transfer balance, making your overall balance higher. Something to seriously consider – is this fee worth it?
4. If you don’t make your payoff goal, will you be in the same boat?
Meaning, does your balance have “back interest” or does the interest start the day your 0.00% expires? If interest will accrue from 0.00% expiration date, what will be your interest rate after that?
5. Note that no matter the interest rates you are paying, adding another card can cause higher interest rates on your other cards and potentially higher interest rate on the new one after your 0.00% interest rate
What this means is that at any time, credit card companies can increase your interest rate based on how many other cards you have, if your credit has changed, or many other reasons. Is this card going to cause the other cards to increase interest on those other? Now this question may be unanswerable by you, however, your goal is to reduce debts and reduce them quickly. Not add to the pot. Will this accomplish this in your case?
6. Will you be able to actually close another account or card because you have transferred to a lower/o.oo% interest rate?
Or will you still have a balance with a new card? Again, not a great boat to be in regards to be credit and obligation.
7. What is your level of spending temptation?
Are you certain that you can avoid using this new card for new purchases and completely leave it alone with the goal of paying it off without adding to it? We would never recommend getting another card (or any card in the first place) if any amount of temptation exists. It is NOT worth saving money on some interest to build up more debt.
Pros/Things To Consider That Might Be In Your Favor
1. It can be a BIG boost to helping you pay off debts and best to use on high interest rate loans and credit cards
You can actually save quite a bundle and hit that principle balance pretty hard and be motivated to pay it off fast!
2. Your credit situation might be in a good place
We’ve all been working on the Take Back Your Finances 52-Week plan now for 40+ weeks. That hopefully means that you haven’t gone into further debts, but rather had many months of paying it down and working towards getting into a better circumstance, so it could be the right time without your credit being negatively affected to consider this as a boost in paying off debts.
If the other factors above are in your favor like a good period of 12+ months at 0.00%, no or low fees on transfers, being able to close and cut up some other cards and you feel like you have little to no temptation to use the card (In fact, don’t carry it! Hide it!) then this could be a good strategy.
And that’s what we want you to look into for your challenge: whether this option could be of benefit to you. Answer these questions as you are going through the list of pros and cons to decide if you should avoid it like the plague or if it is good for you in your situation now.
Need to catch up? Come join us on this challenge from the very beginning by clicking on the 52-Week Take Back Your Finances Challenge and sign up to start receiving your automated challenge from the very beginning!
One final thing…we also have a Facebook Group where you can engage in discussions, receive encouragement and talk to others that are participating in the challenges too for more ideas! Head to the Be Intentional with The Thrifty Couple Facebook Page HERE and ask to join us there! You can also invite friends and spouses too!
Disclaimer: We are not licensed financial planners. We are only a couple that have been just a hair-breadth away from bankruptcy and found our way out of debt with a goal to now help others. Please make sure to consider any advice given on our site and in this challenge as tips we have used ourselves; they may not work for everyone. If you have questions please make sure to contact a licensed professional.