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How we used balance transfers (very carefully!)
When J and I started our business, we didn’t really know what expenses we were going to have and when we were going to have them. We used credit cards to finance a good chunk of the start-up costs. In hindsight, it would probably have been wiser to apply for a small business loan, but at the time we wanted to use what appeared to be the easiest, fastest way to borrow money with the least paperwork. Also, the business gradually evolved over about a year, where we slowly spent more and more money getting everything up to speed. There was never a day when we sat down and said “let’s put $38,000 on some credit cards today and start a business.” But about two years after Jay started the business, that’s about how much debt we had. It was overwhelming to me, especially with my debt-free history.Â
So I sat down one day and made a list of every debt we had, with the outstanding amount and interest rate. Just having everything written down in an orderly way on a piece of paper made me feel better. Then I called each credit card company and asked them to lower the interest rates. Every single one agreed. But that still left us with interest rates over 10% for most of our debts (we had a few loans that weren’t on credit cards and had lower interest rates). Fortunately, our credit is very good, so we were getting offers for balance transfers several times a week. Normally I would just shred them, but I started taking a closer look. I read the fine print on a bunch of offers, and picked a few that looked good. We chose one that had a $75 balance transfer fee, but allowed us to transfer $5000 with no interest for over a year. Considering that we were paying over $40/month in finance charges to have that $5000 on a higher-rate card, we accepted the offer. Then we made that card a priority to pay off within the year. Several months later, we found another card that had no banance transfer fees, and would give us 10 months interest free. We used that offer aswell.Â
Within a year, we had our total debt reduced by about half, and we were starting to cancel some of the credit cards we no longer needed. When we called one to cancel, the friendly rep made us an offer we couldn’t refuse. Instead of cancelling, we could transfer $4000 to the card, which would remain interest free forever, as long as we made one purchase each month. That was about 18 months ago, and we still have that card. We have a reminder on the calendar to made a purchase the first week of each month. It has to be at least $1, so we go to McDonalds and rent a DVD for $1.08. Of course, interest gets charged on the new purchase, but the original transfer still has no finance charges. So now we’re paying interest on about $20 that has been charged to the card since the transfer. Our finance charge just went up from $0.50 (the minimum) to $0.51/month. Not a bad deal for a $4000 loan. We just have to make sure we don’t slip up and forget to make a purchase one month, cause then they can charge pretty much whatever they want. Since this is virtually an interest-free loan, we only pay $100/month on the principal, and put the rest of our money to work paying off higher rate loans and padding the balance in our IRAs.Â
Three years ago, I had no clue how balance transfers worked. What we learned is that they can definitly save you a good chunk of money on finance charges, and that not all balance transfers are created equal. Take the time to read the fine print and choose the card that will charge you the least in transfer fees ($0 is good) and give you the longest time without interest. And make sure you know what the rate is going up to after the interest-free period. If you can pay off the whole amount before then, you win!
[...] How we used balance transfers (very carefully!) from Louise at FrugalBabe. [...]
October 16th, 2006 at 12:00 pm
[...] How to use balance transfers. This post shows me how easy using balance transfers can be - once you are paying attention. I think DH and I got into the habit of not paying attention because we feel like we don’t owe that much money. That is a bad habit to be in - debt is debt, large or small, and it doesn’t feel good. [...]
October 16th, 2006 at 10:17 pm
FrugalBabe, nice post on how to use balance transfers to your advantage. A couple of months ago, I wrote a post that had some bullet points on things to consider when using low-rate balance transfers.
Also, keep in mind that once the debt is gone, you can still take advantage of 0% offers but simply put the money in an online savings account like ING, Emigrant or HSBC. It can pay a decent amount assuming you stay on top of the details.
October 16th, 2006 at 11:09 pm
[...] I always love to hear the personal stories. Like Tricia’s conversation with her “pal” and Frugal Babe’s careful use of balance transfers. [...]
October 17th, 2006 at 5:23 am
[...] I’ve always been a goal setter. Be it school, work, or money, I set goals. I don’t normally write them down, but they’re always front and center in my head. I just read a post by Millionaire Artist about her new goal screensaver - very creative. It got me thinking - should I write down my goals? I am a chronic list-maker, and I still stick notes all over my desk (much to my husband’s chagrin, as he’s been trying for ages to get me to use electronic ‘post its’). Over the last few years, when we had lots of business start-up debt, I had a notebook where I kept track of exactly how much we owed to each creditor, and what the interest rate was. Each time I made a payment, I’d record the new debt amount, and each month I’d add up the current total. Even when the numbers were big, it made me feel better to be able to see them on paper and watch them slowly shrink. We currently have only one debt left besides our mortgage - we owe about $2800 to Discover Card. But we pay less than a dollar a month in interest on that debt (as long as we make one purchase a month, we only pay interest on the new purchases, not the original balance transfer. We spend between $1 and $2 each month for our required purchase). Since the HELOC portion of our mortgage is at 8.53% right now, we’d rather put extra money into that account, or into our ING account. So we only pay $100 or $200 a month on the Discover bill. [...]
December 24th, 2006 at 7:52 pm
[...] We got our tax refund this week - $615 was the grand total. That’s good, because it means we were pretty darn close with our estimated payments last year. Yeah for us. Anyway, now we have to decide what to do with it. We can put it towards our HELOC, we can put it in our IRAs, we can use it to pay down our Discover bill, or we can spend it (yeah, right). Logically, it probably makes the most sense to put the money in the HELOC or into our IRAs, since the HELOC is at 8.35% right now, and our IRAs are invested in the stock market. But psychologically, I think I want to put most of it towards the Discover bill. Besides our mortgage, the Discover card is the only only debt we have anymore; we owe $2400 on it right now. It’s from a balance transfer that we made in 2005, which was originally business start-up expenses. We know now that credit cards are not a wise way to fund a new business, but that’s what we did, and thankfully it all worked out. This month our interest charge was 78 cents on the Discover card - it’s zero percent interest on the balance transfer as long as we continue to make one purchase a month, which we have been doing for the last 18 months. We only pay interest on the new purchases, which are always under $2. So it’s virtually an interest free loan. [...]
April 21st, 2007 at 6:30 pm
[...] leaves $700, which we’re splitting between the Discover Card and our HELOC. We feel good about our use of the money. We’re putting it towards things [...]
May 3rd, 2007 at 1:49 am
[...] mastered the art of balance transfers by carefully pursuing good offers and negotiating down interest rates with the banks. By being [...]
July 20th, 2007 at 2:41 pm
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November 12th, 2008 at 6:46 pm