I had a conversation with a friend recently who is battling credit card debt. A few years ago he found himself in quite a pile of credit card debt and has been working to get into a better financial position. He has since stopped putting any purchases on the credit card and has been paying well above the minimum payment, which are all positive steps. However, it will still take nearly two and half years to pay off the balance.
A few details: My friend has paid his credit card balance down to around $10,000. He pays $400 a month, while the minimum payment is around $200. His interest rate is around 15%, which is a pretty average rate.
One thing my friend has going for him is that he has really good credit. He’s never had a late or missed payment on anything (car loans, utility bills, mortgage, etc.). Recently he received a couple letters in the mail from credit card companies offering 0% interest deals on balance transfers, and he asked me what I thought. Basically, I told him that with his good credit he should really take advantage of those 0% interest offers. If he can pay 0% interest, his total monthly payment of $400 would go entirely towards paying down the balance of his card. This will help him to pay less interest and pay his card off faster.
A Speed Bump Along The Way
He was pretty excited about this, so he went ahead and applied (and was accepted) for one of the new credit cards. However, much to his dismay, the credit limit on the new card was only $5,000. He was pretty frustrated, and we talked about some possible strategies:
1. Call the new credit card company, explain what he’s trying to do, and ask them to increase the credit limit to $10,000 so he can transfer the entire balance.
2. Open up another credit card account with a different company (since he received multiple offers in the mail). If they offer the same $5,000 credit limit, he can simply move of his balance to one card and half of his balance to the other card.
He was pretty frustrated by the whole situation and talked about giving up on it and just continuing paying on his existing card (and paying interest). I did my best to dissuade him from that choice and ran some numbers to explain.
Keep Paying On The Existing Card
With a balance of $10,000 and an interest rate of 15%, it will take my friend 31 months to pay off his balance in full if he continues to pay $400 a month. During those 31 months, he will have paid close to $2,100 in interest.
Open Two New Cards At 0% Interest For 12 Months
With a balance of $10,000 and an interest rate of 0% for 12 months and then 15% after the introductory period, it will take my friend 27 months to pay off his balance in full if he continues to pay $400 a month. During those 27 months, he will have paid just over $500 in interest.
Continue Playing The Balance Transfer Game Until Everything Is Paid
One option my friend and I didn’t discuss was that after the 12-month 0% interest period expires on his new cards, he can sign up for yet another 0% credit card and continue to pay no interest. This does add a step to the process, but opening up another account a year from now should be no problem with his good credit. With a balance of $10,000 and an interest rate of 0% for 12 months and then 0% for another 12 months on a different credit card, it will take my friend 24 months to pay off his balance in full if he continues to pay $400 a month. Additionally, he will have paid zero interest.
The Bottom Line
I know my friend is frustrated that what he thought was a one-step plan isn’t quite as easy as the thought. But the difference between continuing to pay on his current card and instead transferring the balance to new cards at 0% interest is pretty significant. He can pay over $2,000 in interest doing the same thing he’s been doing or pay no interest at all and pay his balance off 7 months sooner by taking a couple additional steps.