This week, my mailbox reminded me how paying off credit card debt is an uphill battle. And when that minimum monthly payment is mostly going to toward the interest, the climb is even more difficult.
Dear Mary: May I ask your advice? I have a credit card balance of $4,500 at 18 percent interest. My FICO score is 700. I've been paying the minimum monthly payment for too many years, but I am determined to pay this off in the coming 12 months.
Would it be wise for me to transfer this to a new Chase Slate credit card that offers zero percent interest with no fees for 15 months? Or should I keep what I have, bite the bullet and just pay it off over the next year? — Mary Beth
Dear Mary Beth: Let's look at the numbers. If you keep what you have and pay off the $4,500 at 18 percent interest over 12 months, you will make 12 payments of $413 each, for a total of about $4,950, of which $451 will be interest.
If you transfer this $4,500 balance to a zero percent card, a quick calculation shows you will make 12 payments of $375 each, saving you that $450 in interest. That looks like a no-brainer. And if that were the only consideration, my advice would be to go with the no interest option and keep $450 in your pocket.
But there are other things to consider — the risks you're certain to encounter.
Most balance transfer offers involve a fee for moving the balance from your old card. A typical fee is 3 percent of the balance. So, for example, you'd be charged $135 on a $4,500 balance. That reduces your potential savings and would increase your intended monthly payment to about $388, but you would still come out ahead.
You have to think about where this balance came from in the first place. For whatever reason, you saw a revolving balance on a credit card as a viable option. And, apparently, things got out of control. You'll tell yourself you will NEVER use the paid-off account again. But you will leave it open to have just in case of an emergency. I know this because I know myself. Been there, done that. That card with its big available credit limit will call your name — in soft, sweet tones.
Another risk is that something will happen in the next 12 months that you'll see as preventing you from making those big payments (of $388 or $413, depending on which way you go). Should something go sideways, the new credit card account with zero percent interest will be the easiest place to make adjustments. You'll be constantly aware that you have the option of paying the small minimum monthly payment rather than sticking with your plan to pay the big payment each month, or the option use it to make a new purchase or more.
If you go for the balance transfer option, Chase will be delighted, and it will be even happier if you cannot quite get the total balance paid down to zero dollars within the 15 months of grace. After all, that is exactly what it is counting on happening! After the introductory period, the interest rate on the account will bump back up to a more typical 18 percent or so.
Risk Vs. Reward
All this is to say, it is not an easy choice. If you are totally certain you will pay $388 per month, come hell or high water, a zero-interest balance transfer is definitely be the way to go.
Whichever way you choose to go, stick with it. Understand the temptations you'll face, and determine right now that you will not give in, that you absolutely will not add a single purchase to the account, and that you will never miss a payment regardless of the sacrifice that may require.
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate webpage at www.creators.com.