On a Slippery Slope: Robbing Peter to Pay Paul?
The other day, I was sifting through my junk mail. I was so bored that I actually read some of the special offers headed my way. Alongside the opportunities to buy limited-edition collectible plates featuring Elvis, I found yet another credit card offer. This one, though, promised that I could pay off all my credit card debt by applying for another credit card. That seemed just a tad backwards to me – if my credit card debt is too high, I should get more credit? My first impression was “scam” but I did some checking and it turns out that there are some very legitimate reasons to use one credit card to pay off another.
In fact, the process can work quite well. Let’s say that you have two to three credit cards. One has an 18% rate, one has a 12% rate and one has a 16% rate. If you can, use the 12% card to pay off your other two. Then, start making the largest payments you can on that one card – much higher than your minimum payments. You will be paying less interest – 12% rather than 18% or 16% and you will only be facing one bill per month. The money you save on your interest can go towards paying down your debt even more.
If you have too much debt to put on your 12% card – or whatever your lowest card is – transfer as much as you can of your most expensive debt to your lowest-interest card. Pay that down as much as you can while keeping your other credit cards current and then transfer more to your lowest-interest card and repeat until your debt is whittled away.
I did some phoning around and it turns out that even those “get a credit card to get out of credit card debt” offers may not be as scammy as I thought. Many promotional offers lure you in with great rates – 5.9% or better – for a specific period of time. If you can pay off your entire credit card debt in that time, you could be saving quite a bit. Plus, the money you save in interest by switching to the new low-cost credit option could go towards your principal, helping you tackle that credit card debt further.
The one problem is that many of these card offers come with lots of fine print. In some cases, for example, the interest rate after the introductory period may be higher than whatever rate you’re paying on your cards now. If this is the case and you cannot pay off your debt before the introductory offer ends, you could end up paying more. Some card offers are extra tricky and state in teeny print that if you transfer balances from your new card within a specific period, the credit card company will apply the regular interest rate to all outstanding balances retroactively. This could be a rather nasty financial surprise and could set back your get-out-of-debt plan significantly.
Related posts:
- Balance Transfer Checks: A Breakdown
- Watch out for the traps
- The Credit Card Newbies Guide (Part 2)
- Interest rates – one of life’s great mysteries…
- Credit Card Arbitrage (Pt. 2)
The other key with these offers is self-control. If you get the new card, transfer the balance, and then rack up the balances on the old card again – you’re in worse shape than when you started.
However, if you can resist the urge to use those old cards, then this is a great way to get out of debt more quickly, and with paying less interest.
Along the line of what Llama Money said…This can work but only after changing your own behavior. Now that I am very disciplined I opened up another credit card that charges 7.25%. It is saving me a lot of money. However, I tried doing the same thing about 6 years ago. I transferred my balance to the card with a lower rate, only to rack up charges on my old cards and I was in a deeper hole than when I started out.
This can work…..but you have to CUT UP those old cards!!!!! Get them completely out of the house! My husband and I started doing this but found that we’d dig out the old card when we needed something (by need I mean WANT)!
This is why people get in more problems trying to move this debt around.
One way to dance around that, however, is to transfer your balance whenever the promo rate gets close to expiring. I agree with the above commentators that there’s no use in doing any of this if you’re just going to keep charging (as you know), but if you’re doing it as a strategy to pay off your debt faster while incurring as little in interest charges as possible, this is the way to go. The best option? Transfer to a card with a teaser offer of 0% interest for balance transfers for, say, 6 months. If you can’t pay it all off in 6 months, five months down the road shop for a new card and do it all over again. You can potentially pay 0% interest for over a year doing this. But as you said, read the fine print!
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Hi Jonathan, Mike, (two of you? more? only one going by aliases?!?) I’m Shanti, by the way. I’ve read your blog on several occasions from various links, but I’ve just subscribed and am reading through some of the more recent posts. Sorry for the onslaught of comments! :P