As much as I always tell people that they need to get their debt under control and knocked out, I'll also freely admit that I'm not flawless and I do have a bunch of debt sitting around. The mortgage on the house, obviously. But also credit card debt. A lot of it comes from a particularly rough summer a few years ago (Tucker needed surgery, the air conditioner needed to be replaced, some other expensive event that escapes me at the moment), but a lot of the rest is just general stupidity or impulse purchases or the usual "something came up". Life gets in the way of our perfect ideas, but the important thing is to keep soldiering on and get it under control.
A useful tool to help out with that is a balance transfer offer that your credit cards will frequently give you. They're pretty standard - your rate drops to some low number (usually between 0-7%) for several months or years (or if you're really lucky, until the balance is paid off), and then hops back up to whatever your normal purchase rate is, which nowadays is usually in the 12-18% range.
They almost always charge a balance transfer fee that can be a huge amount of money. For example, my cards are through Citibank, and their balance transfer fee is the greater of $5 or 3%. That's a chunk of change - for every $10,000 you transfer, you pay a $300 fee for the privilege of being allowed to pay them more interest on that $10,000 going forward.
But it still works in your favor - we'll simplify the math here a bit at not factor in compound interest or any payments you're making. At my old rate of 16.99%, that $10,000 would cost me $1,699 every year it's on the card. That's $3,398 for two years if it just sits there.
If I transfer it off and bump it down to 3.99% for the next two years, I pay a $300 fee to be allowed to do that, but only pay $399 annually, which is $798 for 2 years. That plus the transfer fee is $1,098 in payments, vs the $3,398 it would've been otherwise. That's a savings of $2,200. I can suck up the $300 fee.
Unfortunately, back in the real world, the numbers aren't so simple. And I didn't have one balance transfer offer, I had three -
And nowadays I am in the market for a balance transfer - we've got a balance sitting on a different credit card, and its balance transfer rate is about to wear out and jump the rate up to 18.99%. Ouch. So I want to move it to something with a lower rate for a while.
But which of those offers will save me the most money?
The naive person would say that I should go with the 0% rate, since that means I accrue no interest for the next year and a half. The cynical person would say that I should go with the 1.99% rate because the bank is probably intentionally trying to trick me into one of the other offers which'll cost me more money. The confused person may just split the differenece and go with the 0.99% rate, figuring it's close enough.
Fortunately, I don't guess about any financial planning. I use Debtinator.
So I fired it up and made a copy of my data file so I could muck about with it and not damage my actual data. This way, I could fiddle with the copy all I want and then just throw it away when I was done.
First, I ran my scenario as is, allowing the balance to sit on the existing card at 18.99% starting next month. Ouch.
Then I adjusted it to try out each of Citibank's offers in turn. Here's the results:
Wow.
It's obvious that our hypthetical cynical person would've come out way ahead, and the naive chap that assumed getting a 0% interest rate is always the best bet would've lost out. The 0% rate costs would've cost me $265 over the lifetime of my debts over the 0.99% rate, but a whopping $1,084 vs the 1.99% rate.
The 1.99% rate is the biggest money saver because even though the card accrues interest at the very low rate of 1.99% vs the 0% offer, it stays at 1.99% for an additional 6 months. Calculating the compound interest for the 16 months that Offer 2 would be in effect, it is 2.653% of the loan. Over the same time period, Offer 1 is actually 8.495%. Ouch.
Needless to say, I'll be going with Offer 2. Sure, I pay a smidgen of interest now, and it doesn't initially look as nice at the 0% offer, but if it'll save me a little more than $1,000 total overall, I'm happy to do it.
This is why I love Debtinator. It takes all the guess work out of everything and ensures that you know what the best course of action is. And I spent more time writing up this blog post than I did calculating the data. :-)
| 10/24/2006 | The Seventh Story of the House |
| 10/21/2006 | The Sixth Story of the House |
| 10/13/2006 | The Fifth Story of the House |
| 10/04/2006 | The Fourth Story of the House |
| 10/03/2006 | The Third Story of the House |
| 10/02/2006 | The Second Story of the House |
| 10/01/2006 | The First Story of the House |
| 10/01/2004 | It's Your Turn |
| 10/02/2003 | The Experiment |
| 10/02/2003 | The Stain |
| 10/02/2003 | The Recorder |
| 10/02/2003 | The Secret Room |
| 10/02/2003 | Why you should always carry tools |
| 10/02/2003 | The Solicitor |
| 10/02/2003 | The Picnic |
| 10/02/2003 | Moving Day |
| 10/02/2003 | The Very Short Life of a Fat Man |
| 10/02/2003 | Life on a Farm |
| 10/02/2003 | The Mooresbury Men |
| 10/02/2003 | A Better Killer |
| 10/02/2003 | Scary Noises |
| 02/01/2003 | The Wind Blows In My Heart... |
| 01/15/2003 | I Am The Goddess |
| 01/15/2003 | Freak |
| 01/12/2003 | They Won't Be Coming Back |
| 01/12/2003 | Bugs |
