A Neat Financial Trick

A lot of people have debt. Maybe its a reasonable amount: a bit on a card from those car repairs or your daughter’s wedding, an affordable car payment. Maybe its not so reasonable. Americans have an average of over $15,000 in credit card debt per household, if the household has at least one credit card. The average interest rate on this is in the teens. This may be skewed a bit by the households in serious debt, but even if its really only an average of $10,000, that’s still a nice chunk of change of debt. That’s 1/5 of the average yearly income for a household. Add in car payments, student loans, home mortgage, etc., and many of us are seriously in the hole.

Now, I’m not saying all debt is bad. People can’t usually come up with $200,000, give or take, to buy a home outright, and its good to provide a home for your family. There are smart ways to use credit and loans.

But dang, if that interest rate on credit cards and loans doesn’t get you.

It doesn’t matter if you’re in over your head or just trying to build credit by using it wisely. You’ll pay hundreds, or even thousands, beyond what you owe thanks to interest.

Unless…unless…

I was talking to my dad a couple weeks ago about building credit and investing. My husband recently got a career opportunity, which he jumped on and got into, which means we’ve gone from scraping by to looking at preparing to be homeowners in a few years. That means building credit and a down payment.

My dad had a great tip for me about paying down debt and loans with significantly less interest. Handling credit well does, of course, also improve your credit score. Win-win.

If you have ever gotten a credit card, you’ve probably subsequently gotten credit card offers in the mail fairly regularly. If you’re like me, you just threw them away. Or if you’re irresponsible, you opened them and used them very poorly.

But pay attention. You can use them smart. You may want to keep some of these credit card offers. Often, these credit cards will offer a 0% (or perhaps just very low, but 0% is better) interest rate for a period of time; 9 months, 15 months, something along those lines. Now, they may or may not have a transfer fee. If they do, it gets a little more complicated, but if they don’t, or if there’s no transfer fee for a short period of time, you’re golden.

What you do is you transfer as much of your debt, especially high-interest debt, onto this card as you can reasonably pay off in the amount of time that the card has 0% interest. Then you just pay it down in that amount of time. If you have 9 months and you can do $100 a month, then transfer $900 onto the card. That’s $900 that you don’t have to pay interest on.

If there’s a transfer fee, then you have to think it through a little more carefully. Say there’s a 3% transfer fee, but you’d be transferring thousands from a card with a 15% interest rate. You’re still saving money by paying a 3% fee upfront but no interest instead of paying 15% interest on that same amount of money. On the other hand, if it’s only a couple hundred and the card you’d be transferring from has a low interest rate, you’d probably do better juts paying off that couple of hundred quickly and not transferring. Be smart about it. Do the math if you’re not sure. There are computer programs that can help you do that.

One of the keys with this, other than doing the math if there’s a transfer fee to make sure you’re actually saving by transferring, is to keep track. Keep track of which card stops having a 0% APR when, and the transfer fee, etc. If you keep putting a balance on the card and it’s suddenly got a 22% interest rate, you’re not doing yourself any favors, especially if you have another line at a lower rate.

I made a simple table to keep track. I have six columns: card ending (last four numbers; keeping the whole card number written down or in your computer is riskier), card holder, card limit, when the 0% (or extremely low) APR ends, APR (after the offer), and transfer fee. You’ll probably also want to note when you cut up a card so you know it’s no longer available.

Another key would obviously to not get in any unreasonable debt in the meantime, if you’re trying to get out of debt. If your car is dying and you need repairs or a new (reasonably priced) car, that’s one thing. If you want to go on a shopping spree, that’s another. Be smart.

Then the question is, what do you do with the card when the 0% APR is done? Often the interest rate jumps up to the teens or even low twenties after that, so putting money on that card would be unreasonable. You want the card paid down by then, and then, as soon as the interest rate jumps up,  you cut up the card. Don’t close it. Closing a line of credit actually hurts your credit score a little. Having an open, paid off, untouched line of credit does not. It essentially tells the credit bureaus, “I can responsibly handle having open lines of credit.”

You get the perks of this, right? Not only do you save on the interest you’d pay, which can amount to thousands in some cases, but you also pay down debt for less, and build your credit.

It’s brilliant. It takes some financial responsibility to do successfully, because the last thing you want is to use the excuse of no interest to add a few thousand more to your debt unnecessarily, but if you do it right, it’s amazingly helpful. Especially if, like us, you’re wanting to build your credit score in the interest of making  a significant purchase, like a home, at some point down the road.

This was just too good not to share. If you didn’t know this trick already and you’ve got some debt to pay down, I hope this helps you.

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