Credit-Card Payment Options Riddled with Risk

Dear Mary: May I ask for your advice? I have a credit-card balance of $4,500 at 18 percent interest. My FICO score is 700. 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 0 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

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Dear Mary Beth: First, 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 $412.56 each, for a total of about $4,950, of which $450 will be interest.

If you transfer this $4,500 balance to a 0 percent card, you will make 12 payments of $375 each, saving you that $450 in interest. That looks like a no brainer. If it were only a matter of dollars and cents, it would be better to go with the no-interest option and keep $450 in your pocket. But there are other things to consider.

You have to think about where this balance came from in the first place. You paid for stuff with credit because you didn’t have enough money. For whatever reason, you saw a revolving balance on a credit card as a viable option. Apparently, things got out of control. You did not have the financial maturity to make wise decisions and you ended up with a big pile of high-interest credit-card debt.

The biggest risk you face in transferring that balance to a new 0 percent account is that you’ll slip back to your old ways. You’ll see the old account that you’ve paid down to $0 as your “rainy day” fallback. You’ll tell yourself you will NEVER use it, never allow a balance to build up on it—never, ever again. But you will leave the account open to have just in case of an emergency. I know this because I know myself. Been there, done that.

Statistics tell us that within two years, you will run it right back up to the max. Stuff will happen, you’ll have emergencies. You’ll be invited to go on a cruise or experience something you’ve always dreamed of. That card with its big available credit limit will call your name—in such 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 ($375 or $413, depending on which way you go). Should something go sideways, this credit-card balance will be the easiest place to make adjustments. You’ll be constantly aware that you have the option to pay only the small minimum monthly payment rather than keeping to your plan to pay the big payment each month.

If you go for the balance transfer option, Chase will be delighted for you to do that and even happier if you cannot quite get the total balance paid down to $0 within the 15 months of grace. They’ll just default you into the big interest rate (plan on 22.99 percent) and it will apply retroactively to the first day that you took the transfer. You’ll end up paying a lot more than $450 in interest in the long run, should that happen. Read the fine print.

All this to say, it is not an easy choice. If you were totally certain you would pay $375 per month come hell or high water, that would be the way to go. The initial hit you might get on your credit score for opening the new account and closing the old one would clear itself as you reduced your debt over the year. But if it were going to be easy to do it, wouldn’t you already be making at least $375 payments each month on that account?

I can’t tell you what to do. My job is to hold a light and a mirror to help you see things clearly; to give you the information you need to make the best decision.

I wish you well as you do that, and I hope that you will let us know what you’ve decided and how it is going for you.

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9 replies
  1. Martha
    Martha says:

    Typo Alert! In the letter about the mother who helped her children financially, this sentence appears: “At family
    gatherings, she’ll say to others in our pretense…” See the typo? “pretense” should be “presence”!
    My pleasure to be of service. Grammar Constable is on duty.

    Reply
  2. DianaB
    DianaB says:

    Yes, we are aware of those things, as you will read in my post. The effective rate is still 0%, regardless of the transfer amount. And it is not a hidden percentage–it is stated right there in the offer. You do not get charged interest on the transfer fee so there is no effective interest rate that changes or comes in to play until the end of the offer period. That is why you read all the printed material before you decide.

    I think this subject has been now run to death ladies and gentlemen.

    Reply
    • Maggie
      Maggie says:

      I have used these offers in the last few years, as my husband did not subscribe to the same debt free behaviors in his business as we did at home, and the recession happened. And, as all can attest, business debt is personal debt. We could have probably declared bankruptcy, but that just wasn’t an option we wanted to use. To pay off all the obligations, once we were able to qualify, I used the 0% offers extensively to free us faster. (I must caveat here that I am a very disciplined person.) Yes, the transfer fees are stated clearly, however they do represent a cost that has to be weighed against an interest rate. I transferred all I could and forced my self to pay each off in the time allowed. I only missed on one card by one month, and I would like to challenge the statement that all of the interest is billed retroactively. For the cards I used, I verified that ahead of time, and no major issuer used that technique. The interest simply kicked in from the time the 0% expired. That being said, 0% STORE offers are most definitely retroactive to the day of purchase, and must be paid off with NO error in time.

      To the original questioner – only you really know you. Will you be back in this boat if you use the 0% option? Will you get out of debt and stay out? The math is obviously in your favor to take the 0% offer – but you have to make sure the psychology is in your favor too. If you need to close the first card to protect yourself, then do it. To heck with your average length of credit – it matters less than your financial health, and the credit impact could be insignificant, dependent upon the length of time of your other history. If you can leave it open, then ok. Your credit will take a minor hit while you open a new account and put some $ on it (both cards could report a balance for a short time depending on date of transfer), but all in all it will even out in a couple/few months. And your card will show paid as agreed with a $0 balance whether open or closed.

      Credit Karma or Credit Sesame have tools to help you see the possible impact of a new card, if you are comfortable using them. They also target credit card offers to your credit score, which helped me as I went. MyFICO and creditcards.com were other tools I used. I wish you well – I remember desperately wanting to be free of the debt, and the 0% helped lift a weight much faster.

      To BS Bishop: You are correct – the advice is spot on. These issues are result of the over use of credit – in our case in a business, in DIana B’s it was the for living expenses while unemployed, but frankly, for most it is overuse to inflate lifestyle to match expectations. And that is a psychological aspect of money/expectations that must be dealt with.

      To Diana B: Do you intend that your tone is condescending? Regularly? People contribute here based upon their personal experience, not to attack you or anyone else. And this topic has clearly not been “run to death” as evidenced by the number of folks who ask about it every day, and the number of articles and blogs devoted to it.

      Reply
      • DianaB
        DianaB says:

        Actually, Maggie, I was talking about this particular comment board when I said the topic had been run to death. Sorry for the misunderstanding. As far as being condescending, that was certainly not meant to be the case. There are simply a lot of people who do not understand the zero % credit offers and really do not read them. They simply apply, use and apply again, much like shampooing one’s hair twice, and get themselves back in the same pickle they were originally in and a boatload of credit cards trailing along resulting in horrid debt and horrid credit scores. My apologies to anyone who did not understand that.

  3. DianaB
    DianaB says:

    Because this lady would have a paid credit card does not mean she is going to run back out and use it to run up the card again. You are assuming quite a bit, I believe. I do not even carry my credit card unless I am on a specific mission to use it for a particular reason. It is stashed away at home and seldom comes out. I have more than one card with zero balances but just because I have them does not mean that I run out and charge on them and my interest rates are well below 18% which I have not experienced in years. If anything goes over 9.9% that card is NEVER used again.

    The two comments below relate to reading the fine print that comes with the offer as far as fees and also what the new interest rate will be when the initial 15 months is done. That can be staggering or it can be less than what you are currently paying. So a free 15 months and then perhaps a nice smaller interest rate after that. If it is anywhere less than your current 18% I would go for it. I have done these transfers on occasion with no ill effect because I pay attention. They have no negative impact on your credit report, either. The transfer fee of 3% if that is what it is would be around $150, still less than your interest over the payoff period right now by about $300 that could be paid toward the new card balance.

    Having said that, I was somewhat appalled at the advice that if you do transfer to the new card that you close your old card account. That is absurd. It would show as paid as agreed and having been paid in full and that looks just dandy on your credit report. Further, for those who get their credit reports regularly to check them, there is noted the length of credit history on your report. I am 72, have a credit history of a few decades. However, once a very old credit card account is closed, it eventually shortens your credit history. Mine is actually only showing like the last 10 years or so of credit history.

    Reply
    • Brad Bishop
      Brad Bishop says:

      I thought the advice from the column was spot-on.

      Once you’re into balance-transfer games you probably were irresponsible in the handling of your credit. Further, Chase, or any other bank, isn’t in the business of loaning “free money”. They’re making a bet, one that they’ve researched heavily and have the statistics to back up the business decision, that the person who is looking to do the balance transfer is isn’t going to pay it all off or will have some little bump they can’t handle and then Chase will get their 22.9% from day one and have someone on the hook paying them, while not indefinitely, probably for a very long time. That’s the game. Chase isn’t doing anyone any favors, nor should they, they are making a very informed business decision which they believe will pay off in a fairly big way. If they do this to enough people then there’s a large portion of the population going to work everyday and paying Chase. They’re working for Chase and it’s all voluntary.

      You can argue how it affects her FICO score or whatever but if the woman isn’t being responsible then it’s more important to close the card and not be tempted than it is to worry about the average age of her accounts and how that affects her FICO.

      Reply
      • DianaB
        DianaB says:

        Well, thanks, but I was never irresponsible in the handling of my credit. Nothing in the article says the lady in question was either. I did use my credit cards rather extensively when I was unemployed twice in the last ten years for a year at a time. Other than that, I currently only owe less than $1,000 for a new heat pump, having paid off $5,000 in less than two years. The rest of the information was just that, information for everyone to consider when thinking about using these transfers. A little overreaction on your part, I think. Thanks for sharing though.

        And as far as the lady in the article is concerned, she cannot close the account if she still owes a balance. Therefore, her card is still active. We were just discussing ways to make her payments have a better impact on the balance.

        I know how the credit card companies work. I have made great use of their offers and that is why I don’t have lots of cards or big balances. I am pretty smart, even though you may not think so. Perhaps you should re-read my entire comment. Have a great day and I will do the same :))

  4. Mo Ray
    Mo Ray says:

    And there’s always the hidden percentage they charge you for the privilege…. It’s usually 3% or $50, whichever is higher.

    Reply
  5. Susan
    Susan says:

    One other important thing to note on those 0% offers…..they often ask for a “transfer fee” of up to 5%. That’s the same as interest. And they add it to the balance. So when you do the transfer, your balance grows immediately. So the effective rate is no longer 0%

    Reply

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