Nobody likes credit card debt, and when you’ve woken up to the path of FI credit card debt can feel like a giant shackle around your ankle, chaining you to a lifestyle you no longer identify with. No matter what got you into credit card debt, whether it was common lifestyle inflation or a few unfortunate events. There are ways to make the most of your credit card debt while you have it.
Of course, paying off your debt should be your first order of business. But, as with everything with FI, there are some smart ways to start optimizing your credit card debt and make it sting just a little less. Or, help it work out in your favor.
How I Found Myself In Credit Card Debt
As the author of this article, I’ve fortunately never been in credit card debt long term. Though, I did find myself in a bit of a financial pickle after I bought my first house in 2017. After a few months of noticing the heating and cooling bill was insane and the temperatures wildly fluctuated from room to room, I popped up in the attic to discover there was almost no insulation in half of my house.
Turns out my “highly recommended inspector” didn’t do a great job inspecting the attic. And now I was facing a $2,000 insulation bill to fix the problem. Better insulation would take my heating bill down from the heavens but cost a bunch up front. Since I’d just purchased the house and had a few big things go wrong in the first few months, I was just about broke. Yep, in my first year of homeownership, my emergency fund was tapped out, and I was frantic.
My options weren’t great. I could beg family members for a loan (awkward). I could seek financing for the project through the insulation company. Or, I could put the balance on an existing credit card at 18.24% interest.
Fortunately, there was a fourth option I’d never considered! Whether you have an unexpected expense or need to hack a high-interest credit card debt you’ve been dealing with, there is an alternative. Take on a new credit card with an introductory rate of 0% APR, transfer the debt, and pay it down like mad to avoid charges. Essentially, it’s an interest-free loan.
Create A Debt Repayment Plan
If you’re working through your debt, you’ll need to balance your debt repayment with building cash savings and saving for retirement. This mix of paying down and saving up will be a personal decision. Much of it depends on your risk tolerance and how much debt you have in total.
I’m a fan of the Dave Ramsey plan of building a small emergency fund and then paying off your debt as quickly as possible with a debt snowball. I also can’t begrudge someone for contributing to the 401K to get the employer match.
Go through your entire financial picture, the good and the bad. See what’s working in your favor, and what needs to get knocked out first. Compromise with your spouse if needed. Find a plan everyone can get excited about.
After that’s taken care of–we have a few hacks that will allow you to use the handy hack of balance transfers to consolidate your debts and avoid interest payments. While using the balance transfer trick is awesome, we caution you to be mindful of the aforementioned repayment plan. Without a clear financial picture of your past behavior and a plan for your future, you’ll likely end up back where you started after the 0% window lapses. So, be careful!
Stall Your Interest Payments With Balance Transfers
Benefit 1 – Consolidate Your Debt
If you have different cards from different issuers that all have different interest rates, minimum payments, and due dates, it can get tricky to manage.
A balance transfer card will allow you to move your debt from one credit card to another. The theory here is to move the balances from several high-interest rate cards to one card with a 0% introductory offer.
This allows you to put all of your eggs in one debt payoff basket. Creating a path for easier management, as you will have one account and no interest.
You likely will have a 3% fee on the balance you transfer, but if you’re taking advantage of a 0% APR for 12+ months, you’ll come out ahead.
There are tons of 0% APR cards out there. If you need your debt in one place, using the balance transfer trick can help simplify your repayment plan.
Benefit 2 – Save Hundreds On Accumulated Interest With Balance Transfers
Utilizing a balance transfer to a card with a 0% APR for an extended period can give a reprieve from the added interest. Letting go of the 16-24% (or more) interest that’s racking up each month, which makes it even harder to get out of debt, is like a breath of air.
If you are using the Dave Ramsey Snowball Method, this may not be the most psychologically satisfying way of paying down your debts, but in terms of optimizing your credit card debt, it absolutely is.
Deferring your interest payments for even six months can save you hundreds, maybe thousands in interest charges on your debt. Even if you’re unable to pay off the full balance before the new rates kick in, look into it.
Of course, setting a goal to wipe out your debt in your 0% period can be an excellent goal to have!
Things To Know About Balance Transfers
Of course, even with great things (and 0% interest is a great thing), there are usually a few catches. Here are some things to look out for when you are thinking of optimizing your credit card debt with a balance transfer:
Balance Transfer Fees
As mentioned, your new card will likely charge you 3% or perhaps more, to transfer your debt on this new card. So, do the math to ensure you’re coming out ahead. This wouldn’t be ideal for small sums or if you aren’t planning on paying off the balance on time.
Watch Out For The Interest Rate
What interest rate will you be facing if you don’t pay your debt off in the introductory period? As long as you’re aggressively paying down your debts each month, even with a 17–25.99% interest rate, you could come out ahead. But be aware and attentive to your plan!
Do Not Miss A Payment
Doing so will cancel out that sweet 0% interest period, and you’ll be stuck where you started. Set up automatic payments to cover the minimum balance and then pay more.
Be Sure You Know What’s Covered
Be sure to read the fine print. Not all 0% intro offers are created equally. Often they have different terms for purchases and balance transfers. Some only cover one or the other, or they may have different lengths of time. For example, a card may offer 0% for 12 months on purchases but only six months on balance transfers.
Annual Fees
Look for annual fees on the card. If you find a card with an annual fee make sure you are getting more value than you paying in fees. There are plenty of cards that do not charge annual fees. While you are getting out of debt, it probably makes the most sense to avoid annual fees.
Transfers Don’t Give You Points
If you’ve signed up for a card with a promotional rate, realize that a balance transfer usually won’t count towards the sign on bonus. Right now, focus on paying down your debts. Using travel rewards is not for you right now. Once you are debt free and have the rest of your financial house in order, then you can start thinking about travel rewards.
If you’re in debt, there is a light at the end of the tunnel! We hope this debt hack will make the repayment period a little less painful. No matter where you’re at on the path to FI, commend yourself for moving forward and finding some optimizations along the way. You got this!
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