Choice #2: Paying Down the 0% Credit Card as Fast as We Can
Last week I talked about how we came to the decision to have a $1000 emergency fund while concentrating on debt reduction. Another choice we’ve made that has caused some alternative opinions is the use of our 0% credit card offer and how we are paying it off.
We practice what might be termed the opposite of credit card arbitrage. Credit card arbitrage is taking a 0% credit card offer and putting the money into a high yield savings account, earning them interest for the period of the 0% offer, and then paying it off right before it is due. When we transferred our credit card debt to the card with a 0% for 12 months credit card offer (with no balance transfer fee), I could do a very similar thing if I chose to. Our minimum payment is very low (in fact, only 1.5% of our balance) and I could have put everything above that into an ING savings subaccount every month and let it earn interest until the 0% was set to expire (in September 2008). It would earn me a little bit of money which could go directly to debt reduction and help us get out of debt even a little bit faster.
Here is where my personal part of personal finance enters the picture. Just as some people pay down their debt by balance order (lowest balance to highest) instead of interest order (highest interest to lowest) for the psychological benefits of seeing debts completely eliminated, I need the psychological benefits of seeing our credit card balance go down. We’ve had the credit card debt hanging over our head for so long that I just need it to go. Away. Completely. And saving up the money in a savings account would be satisfying as well I think but not enough of a psychological boost to motivate my constant snowflaking. I am motivated each week to find some money to snowflake to my credit card and shoot the balance down even more, and I am not sure that would be replicated for me with a savings account method.
So we pay directly to the credit card. We’re on track to have the credit card debt eliminated completely in early 2008 and honestly, I cannot wait for the day I can say “We are credit card debt free.”
We are credit card debt free!
Has a nice ring to it, eh?
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December 19th, 2007 at 9:24 am
I’m with you on this one! All of our credit card debt is on a zero interest card. The interest goes up in September, and I fully intend to have it paid off by then.
I suppose I could put the money in savings and pay it off at the last minute, but I’d be afraid that we’d have an “emergency”, and I’d spend the money on other things.
For us, it’s best to pay as we go.
December 19th, 2007 at 9:28 am
I think it’s great that you’ve got a $1,000 emergency fund! I also think you’ve made the right decision to pay off the 0% card. While 0% sounds like an awesome deal, there is still risk involved. There is usually a universal default clause in all credit card agreements that pretty much says the CC company has the right to change your interest rate for basically any reason they feel like.
Kill it!
December 19th, 2007 at 9:29 am
I am of the same belief that once I rid myself of the credit card debt, there will be no more balances carried. I will use a rewards card, buy pay it off in full, just like we did 2 years back.
December 19th, 2007 at 2:00 pm
I agree and I would do the same. The painful feeling I get every time I look at my credit card balance is much more inspiring to me than the few dollars I could earn in interest by switching to a 0% card and putting the money in a savings account.
December 19th, 2007 at 10:44 pm
I understand! One of the reasons that I don’t participate in credit card arbitrage is that looking at that balance would make me nervous–even if I knew I had the money to pay it off! Do what makes you comfortable!