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
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.