I’ve Paid For This Twice Already…

Running the numbers - How getting another credit card can get me out of debt faster

And save a significant (to me) amount of money, too! And anyone who has been reading the blog knows how I love to crunch those numbers.
It seems counter-intuitive to me. Credit cards are (partly) the source of my debt, so how can another credit card help me to actually get *out* of debt? The answer is what many many people have already realized long before me and taken advantage of — the 0% interest for 12 months on balance transfers offer. Especially coupled with a no balance transfer fee offer.

I “knew” this, but I didn’t *know* it. It made sense of course that I could save money transfering my balance to a lower (or no) interest rate. But I knew even with transferring, I was not going to be able to pay off my entire balance before the offer expired, so I would end up paying some interest to the “new” card, and so that thought has delayed me in moving forward. But yesterday I finally applied for a new credit card with a 0% interest on the first balance transfer for 12 months from the date of the transfer, and no transfer fee for that first transfer.

And today I am running the numbers and seeing what my options are. Using a conservative time estimate of being approved and able to make that first transfer two months from now, and approximating my credit card balance at that point in time to be $5800, I used the snowball calculator to play with numbers and see what happened. I used paying $300/month fixed towards this debt, which is my goal number.

Option 1a: The interest rate on the new card is a variable rate that right now is 12.4%. Using that percentage rate after the 0% ends, if I transferred my balance and left it there until completely paid off, I would pay $77 in interest and completely pay off the debt in May 2009.

Option 1b: If I used a higher interest rate of 15% after the 0% offer ends (for the rate could go up before then and I am hoping 15% is a high estimate), I would pay $92 in interest and completely pay off the debt in May 2009.

Option 2: If I transferred the balance for the 12 months at 0% and then transferred it *back* to my 10.9% interest card when the 12 months runs out, I would pay $65 in interest BUT also a 3% balance transfer fee at that 12 month mark of $66 (unless there is a fee-waiving offer by Capital One at that moment) and be paid off in May 2009 as well. But a total expenditure of $131.

Option 3: If I waited to transfer and left the debt at 10.9% interest until I could pay the balance in full before the 0% offer runs out ($3600), I would pay $424 in interest before transferring and would completely pay off the debt in May 2009.

Option 4: And, finally, if I just left it at Capital One for the life of the balance at 10.9%, I would completely pay off the debt in July 2009 and pay $545 in interest.

So, in opening this new credit card and transferring my balance there under their special offer conditions, I am paying off the debt 2 months earlier than not transferring at all and saving (depending on the interest rate at the time I start paying interest at the new card) hopefully $478 in interest charges. Clearly option 1 works out the best time-wise and financially, and option 2 could be considered if there was a favorable promotion from Capital One regarding balance transfers at the time I start paying interest on the new card. Either way, the transferring of my balance at this point is the smart way to go.

Why I didn’t do this sooner is still intellectually beyond me. I understand that I was hesitating for emotional reasons, feeling “safe” and “comfortable” with what I know, but sometimes my brain needs to smack my emotional crutches around a bit and say “Wise up!”.
~J

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