March 3, 2009
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When to Consolidate, Pt.1
0% promo: To do or not to do?Credit card consolidation issues used to be simple (it seemed). But now, with interest rates slamming to extremes in both directions, it requires a little more thought to not get burned. It was thought that locking in a low interest rate of 3.99% for the life of the credit card was a pretty safe bet. Even that, now, has become tenable with the sidestepping practices followed by some of the large credit card lenders. With the added complexity of ever-changing agreements, it may be helpful to map out where the ‘stepping stones' are in order not to be ‘washed away' from a consolidation mis-step.
Taking a simple hypothetical example of a moderate situation, let's explain the ramifications of a person having four credit card accounts. Each has an equal balance of $3,000 and none can be paid off fully in a short time. Say you already have a ‘reasonable' rate of 7.9% and just pay the minimum payment of 4%. Just to pay the credit cards off at that rate will take about 13 years. You will have paid almost $1,800 just in interest! You don't even want to know about the average APR of 12%. Best case, if you could transfer to 0.0% APR for the 1stt year with no transfer fees and then back to 7.9% for the remainder, you would have saved $901 in interest. Instead of paying $1,826 in interest, you would pay $925. That's do-able.
But, more realistically, if you're average, then you probably do pay 12%. Using the same scenario, notice how things change. Instead of paying $1,826 in interest over 13 years, now you're paying over $3,000 in interest over 16 years. With the same credit card balance transfer used above (but, returning to the 12% APR), you could save about $1,503 because of that 1st year and pay the remaining $1,540 or so remaining interest over about 15 years.
So, in summary, we can see, simplistically, that at 7.9% APR, the 1-year 0% APR credit card transfer would saved $901 in finance charges. At 12% APR, the savings would be $1,503. We can also see the big difference between 7.9% APR and 12% APR. Lastly, we should note that just paying the minimum 4% payments will pay your lender a good premium at your expense (just the way the Grues like it).