The beauty of the Debt Avalanche method of paying off debt is that it reduces the total amount of interest you will pay by eliminating the highest interest debt first. You really need to get rid of that high interest stuff as quickly as you can. Those monthly interest charges will eat you alive. Transferring debt to a low or no interest credit card might be an option.
What to do with the high interest credit card balance?
I have a credit card with a balance of nearly $4,000. That debt has already been on a card with a 0% interest rate. When I took that original promotional offer, it gave me 21 months of no interest, except for only a 3% transfer fee. I still had some other low interest installment loan debt I was paying on, and this strategy gave me some time to finish that up, without having to pay 12-15% interest on credit cards.
My intentions were to pay off the installment debt and then go to work on this credit card debt and have it cleared up before the end of the promo period. Unfortunately, some medical expenses and car repair costs got in the way. Now the promotional period is over and the interest rate is set to go up to nearly 17%. I’m not interested in paying that much, and apparently, I don’t need to.
I just received another offer from another credit card company to allow me to stretch this out another 9 months for a 1% transfer fee. The total cost of that transfer is less than one month’s interest on the old card. In this case, that will be a lot less expensive than keeping the balance on the old card and just trying to pay it off as quickly as I can. Taking advantage of this transfer is really a “no-brainer” for me.
Or is it?
I actually gave it a lot of thought before entering into this balance transfer transaction. There were reasons that it made a lot of sense, and there were areas of concern.
Is it a good strategy to transfer debt to a low interest credit card?
There are two reasons that you may want to think twice about transferring debt to 0% or low interest credit accounts. The first reason is that it could potentially damage your credit score and the second reason concerns your discipline in paying off debt.
If your personal financial plan is dependent upon having good credit, this is important. Applying for additional credit cards can cause adverse changes to your credit score. Your credit report will show a hard inquiry and the new card will bring down the average age of your credit. Both of these factors are temporary, but you need to be aware that this will occur.
I have a good credit rating. I’m not particularly concerned about a temporary drop, as I have no plans to enter into any additional financing arrangements in the near future. Furthermore, it is a goal of mine to have absolutely no reliance on a credit score for any of my dealings. For these reasons, I have no problem getting a new credit card for the purposes of transferring balances to take advantage of the 0% interest rates.
The debt discipline is another issue. Many people will transfer their debt to a low or no interest account, then immediately charge up their old card to the limit instead of using the balance strategy as a means to get debt paid off quicker, it becomes a method of burying yourself further into the abyss of debt.
I’m one of those many people who have attempted this strategy many years in the past, only to become further shackled with more debt.
That was then. Over the past three years, I have been so focused with “then intensity of a gazelle” ~Dave Ramsey, that I have no concerns with losing control of my debt payoff by using this strategy. I haven’t added any debt since I began this journey from living a life in bondage to debt to creating a life of freedom from that bondage. The journey has been fun, exciting, and rewarding. It consumes my thoughts every day. I can’t imagine ever going back to the way I lived before.
It’s a Personal Decision
Like most everything in the personal finance world, this decision is very….personal. I cannot recommend this strategy to others because I don’t know their focus and intensity. They are the only one who know their conviction to getting and staying out of debt. I only know my own convictions. You are the only one who can feel your own conviction. You are the only one who can determine if there could possibly be any stumbling blocks that might cause you to revert back to previous habits.
If you don’t have an appropriate emergency fund set up, I would absolutely suggest that you stay away from this strategy. Without a stash of cash available to cover life’s issues that inevitably crop up, your credit cards become that emergency fund. It won’t matter how much conviction you have to get out of debt. Things just happen and this will be out of your control.
Balance transfers can be a great tool to use in your debt pay down, but just be wary that you don’t get yourself into a situation that could derail your success.
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