The Pros & Cons Of Balance Transfers

September 20, 2017

If you’re carrying credit card debt and paying on time, chances are you also regularly receive offers from various financial institutions offering you balance transfer deals. If you’re serious about paying off your debt and have fixed whatever issue caused you to accumulate the debt in the first place, then it can seem like a no-brainer — using balance transfer deals can be a key step in getting to zero debt sooner. But before you pull the trigger to transfer your balance to a new card, make sure you’ve considered all the potential pitfalls first.

Advantages of balance transfers

Lower interest rate — The lower your rate, the more impact your payments will make toward your balance. Just make sure you know you’ll qualify for the low interest rate before committing to the transfer or you could end up with a higher rate than your original card.
Accelerated debt pay-off — To determine exactly what the impact of lowering your interest will have on your timeline, plug your info into the Debt Blaster calculator to confirm.
Pay less interest over time — You can also use the Debt Blaster to calculate how much you’ll save in overall interest, but you also need to add in any balance transfer fees. Make sure you do the math before committing to make sure the savings are worth the potential risks.
Consolidation of balances — Balance transfers can also help you to consolidate several small balances onto one lower-interest card, which means you’ll have less hassle and less chance you’ll forget to make a payment.

Potential disadvantages of balance transfers

Transfer fees — Most balance transfer offers include some type of fee, which is typically 1 – 3% of the balance you’re transferring. For example, if you’re transferring a $3,000 balance to a card with a 3% transfer fee, you’ll be starting with a balance of $3,090. Make sure you factor that in to any interest savings calculations you perform. If you can find an offer with no transfer fee and a lower interest rate, take it! (check the fine print first to make sure there isn’t some other catch to make up for it though)
Promo rates — Keep in mind that balance transfer rates are typically lower than new purchase rates, so if you are using the new card to shop while trying to pay down your balance (which is a very slippery slope anyway), you’ll most likely negate the interest savings of the balance transfer. A best practice is not to “comingle” your debt — keep the cards you’re using for low balance transfer rates strictly for paying down balances.
Rate expiration dates — Many times the low rate that card companies offer to entice you to transfer your balance has an expiration date, usually between 8 and 24 months after you open the card. That’s fine, as long as your plan includes that end date so that you can either have the balance paid off or transfer it to another card.
Type A personality traits required — Managing the debt payoff via balance transfer does require a bit of attention to detail, so just be aware that if you’re not Type A like me, you’ll probably need to put some stopgaps in place like setting multiple reminders on your calendar and phone and even asking a friend or family member to make sure you come back and reassess your situation at least a month before any promo rates expire.
Could dig you deeper — The reason that banks offer these deals in the first place is because they know that many people, despite their best intentions, will simply use this new card to accumulate even more debt, rather than pay it off as would be the best plan. When you open a new card to transfer the balance, consider cutting up your old card to avoid the temptation to accumulate another balance on that fresh zero statement. You don’t have to close the card (that could be a hit to your credit), but cut it up or give it to someone you trust for safe-keeping.
Credit score ding — It’s true that applying for credit does cause your score to take a temporary dip, as will closing old cards to make sure you aren’t tempted to run the balance up again, but if your goal is to get out of debt faster and this achieves it, worry less about your credit score (which will rebound) and more about saving money in unnecessary interest and getting out of debt ASAP.

One final thing: make sure that you’re doing balance transfers strictly as part of a debt pay-off plan instead of as a way to accumulate even more debt. I’ve worked with people before who found themselves deeper and deeper over their heads in debt when they started playing musical credit cards with their balance. It’s important that it’s part of a debt pay-off plan and not just a way to stay afloat.

The Best Financial Decision Isn’t Always the Most Obvious One

July 27, 2017

Let’s suppose you have sufficient emergency savings and are maxing the match in your 401(k). You now have several options of what to do with your extra savings. One is to pay down a student loan with a 3.7% interest rate, the second is to invest more for retirement, and the third is to pay down a mortgage with 3.85% interest rate (2.81% after factoring in the tax deduction). Which would you choose? This is the real life scenario of an employee I recently spoke with, so let’s explore the options.

Option 1: Pay down 3.7% student loan

Her initial instinct was to pay down the student loan because it annoyed her the most and she was worried about having that debt if she were to lose her job. But making payments towards the debt wouldn’t actually make her more financially secure until it was completely paid off. In the meantime, she would actually be safer having more in savings and investments that she could use to make the loan payments in case she found herself in between jobs.

Option 2: Invest more toward retirement

She could reasonably expect to earn more by investing her savings than she would save in interest by paying down the loan early, as long as she invested for longer-term growth and wasn’t too conservative. (My general rule of thumb is to pay off debt first if the interest rate is 6% or more, invest if the interest rate is below 4%, and go either way depending on how aggressive an investor you are if the interest rate is between 4-6%.) Of course, she could still decide to pay the student loans for emotional reasons, but investing would likely give her a better return on her money.

Option 3: Pay down 3.85% mortgage

In the end, we decided that it actually made the most sense for her to pay her mortgage down. At first, that didn’t seem to make sense since the mortgage interest rate is even lower than the student loan after the tax deduction. (Her income is too high to deduct the student loan interest from her taxes.)

However, it turned out that she had to pay PMI (private mortgage insurance) until she had 20% equity in her home. When we calculated how much she would save each year in PMI payments as a percentage of the mortgage balance she’d have to pay down, it was 6%. When you add that to the 2.81% interest rate, she would save a guaranteed 8.81% on the money she put towards getting that 20% in equity!

The moral of the story

When deciding between alternative options, first figure out what the expected return on your money would be, either in savings by paying down debt or earnings from investments, but be sure to factor in ALL the possible savings and earnings. (A qualified financial planner can help you do this so long as they aren’t biased towards one choice or another.) Finally, don’t forget the “happiness factor.” If, after looking at the numbers, she decided that paying off the student loan would make her happier overall, that’s fine too…as long as it’s an informed decision.

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Would You Go This Far To Pay Off Your Debt?

July 03, 2017

Do you feel like the stress from your credit card debt and student loans is out of control? Perhaps you’re wishing on stars for a lottery win or an unexpected inheritance which will wipe your financial slate clean? Maybe you’re putting off going to the dentist or taking a vacation so you can pay your credit card minimums? If you’re sick and tired of living this way, ask yourself this question, “Am I ready to do whatever it takes to pay off my debt?”

You are not alone

Our research shows that nearly one in four employees (23 percent) reports unmanageable financial stress. No age, gender, income level or demographic group is immune from financial mistakes. However, the reverse is also true: millions of people of all ages, genders, income levels and demographic groups have successfully tackled their debts and gone on to build very comfortable financial lives.

I know, because I’m one of them. In my early thirties, I was a renter with credit card debt, student loans, a damaged credit score and a lifestyle beyond my means.

Twenty years later, I’m a financially independent homeowner, real estate investor and committed saver who puts away 30 percent of my income. My journey to find financial balance inspired an entirely different career as a financial planner and led me to meet my husband. It all started with my personal declaration of financial independence, and my vow to make whatever changes were necessary to dig myself out of the hole I was in.

Big changes get big results

How did I do it? Initially I tracked my expenses and made small changes that saved $5-10 per day: I made coffee at home, gave up magazines, canceled the gym membership, etc. My fellow planner Kelley Long had similar experiences of cutting small luxuries when she was tackling debt. Although I was proud of myself for making changes, after a few months I grew frustrated. I didn’t feel like I was making progress quickly enough. That’s when I decided that only making drastic changes would get the outsized results I was seeking. Here’s what I did:

I downsized my living space. I had a beautiful, spacious rooftop apartment with a deck, a view of downtown and a short walk to the lake. I gave my notice and moved into the home of some friends for three months while they traveled overseas, then rented a room in a 2-bedroom house for a few years. I saved about $600 per month in housing costs, even if my dignity suffered a little initially, and ended up with a fun housemate. After a few years, I moved back into my own place, but instead of choosing a spacious downtown apartment I chose a small studio. If you’re looking for some wiggle room in your budget to pay down debt, looking at living expenses may make sense. Is it time for you to downsize your housing?

I took walks, hikes and hosted potlucks. As a single woman in an urban area, I had grown accustomed to a social life built around discovering new restaurants, movies and meeting for wine or coffee. That was a lot harder to change than my living space. What would I do for fun? I set parameters for how much I would spend on entertainment per week (about $50, for a savings of about $300 per month) and began to find new ways to connect to my friends. I was proactive, suggesting meeting for a walk instead of Thai food. When friends invited me to dinner or to an event, I politely declined if I’d met my entertainment budget for the week. Parties became potluck dinners, which friends liked because they saved everyone money. There is a secret financial power in home cooking!

I gave up my car. A few years into my financial transformation I was making excellent progress. I had moved back into my own place, up in the hills where there was no close public transportation. Then a twist of parking fate compelled me to give up my car – and not replace it. I walked almost everywhere (a relatively easy thing to do in a big city) and took buses and the train. I will admit: there were occasional moments of embarrassment, such as when I sprained my ankle and friends at work had to drive me around for a few weeks. I chose to explain my decision by saying I wanted to walk more for fitness. This saved me about $300 per month compared to what I had been spending. I’m not the only planner who’s done this, by the way. My financially savvy colleague Erik Carter went carless last year.

How much did I save all together from these big changes? More than $1,200 per month, between reduced housing costs, giving up my car and capping my entertainment expenses. That’s four times as much as I had been saving by cutting small luxuries. Thanks to my willingness to reconsider the necessity of the most expensive items in my spending, I was able to pay off my debts much quicker and save thousands in interest charges.

Tackling debt can feel like climbing a mountain, it is true. But adventurous souls climb mountains every day. Consider making some big changes to climb that debt mountain faster. Trust me, you’ll feel great when you get to the top and look around at how far you’ve come.

Do you have a question you’d like answered on the blog? Please email me or you can also follow me on Twitter @cynthiameyer_FF.

How One Woman Went From The Brink Of Bankruptcy To Retirement Ready In Two Years

June 27, 2017

Last week I wrote about how a workplace financial wellness benefit is different from your 401(k), and mentioned that one of the goals of my work these days is to change lives. In that spirit, I just have to share an amazing story of one woman I had the privilege to work with who literally turned her life around through her financial wellness benefit.

When I met this woman two years ago, she was contemplating bankruptcy but wondering if there was a possible way to avoid it. Additionally, she wanted to get herself to a place of being able to retire and know that she’d be financially secure for at least twenty years in retirement.

It was a tall order, but I’m not one to shy away from a challenge. After reviewing her finances, I told her that she could avoid bankruptcy and get out of debt completely, but she would have to sacrifice. And by “sacrifice,” I really meant it – it was a tough love kind of conversation. She said she was willing to try it, so here’s what I suggested she give up:

Her stuff. I told her she needed a “fire sale” of everything but the clothes on her back and then to live on the bare minimum for a few years.
Her home. She was living in an expensive part of the country, which meant that her monthly mortgage expenses added up to much more than the standard “25%-35% of take home pay” rule of thumb.
Her community. Selling her house wasn’t enough – even if she moved to a different place, the area she lived in was so expensive that no matter what, she was going to struggle just to cover living expenses, which left little room for paying down debt or saving money.

To my delight, she did it! She took my guidance and sold everything, moved out of state and in with her mother until she paid off all of her consumer debt. And now she’s on track to retire when she wants to. Her sacrifice has given her the financial freedom to live life on her terms.

It’s hard for me to describe the gratification that I felt when I she emailed me her last status report to tell me all of this – it’s the essence of why I do what I do. But the real take away is that sometimes in order to get what we want to, we have to take a step back and give some things up. It wasn’t easy for her, but she decided that her long-term financial security (and owning up to the debt she’d incurred) was far more important to her than any house, outfit or piece of furniture. Sometimes it takes some tough love and real sacrifice, but in the end, it’s worth it.

For more on how she did it, check out these resources:

How I Sold All My Stuff Online

Debt Blaster calculator

8 Inexpensive Ways To Prepare Your Home For Sale

Painless Ways to Pay off High Interest Debt

June 28, 2012

Are you struggling with credit card debt? If so, you’re not alone. Paying off credit cards and other higher interest debt is one of the most common goals that people try to save for. Unfortunately, having to pay off a large amount of debt with ridiculously high interest rates can make you feel hopeless, especially if your budget is already stretched. But it turns out that you don’t necessarily need to make huge sacrifices to become debt free much sooner than you may have thought was possible. Continue reading “Painless Ways to Pay off High Interest Debt”

How I Recovered From More Than $30,000 in Credit Card Debt

February 23, 2012

When I was 18, I got my first credit card. What should have been an occasion to mark the beginning of wise financial habits instead began a three-year period of reckless spending and horrible choices. By the age of 21, I found myself in debt to the tune of $30,000 – in addition to nearly $10,000 of personal debt to my parents, who financed my college education. Unfortunately, like many other Americans, I wasn’t able to use credit cards and rewards wisely. Continue reading “How I Recovered From More Than $30,000 in Credit Card Debt”