Was Playing the Balance Transfer Game Dumb?

This is kind of a deep dive into the archives of my over-spending, under-earning past, but I just realized yesterday that my credit card statements dating back to 2009 are all available online and it made me curious about a significant moment in my financial life.

I have no idea how I would have run my freelance financial life (in my early 20s) without credit cards. Maybe I just wouldn’t have had a freelance career, or maybe I would have borrowed from my parents, or maybe I would have come up short on the rent payment a lot. I was majorly boom and bust on earnings, and rarely did I get far enough ahead to have savings to cover my next period of unemployment; usually, I was using what I earned to pay off what I’d racked up during my previous unemployed stint.

However, I got through all of that with no harm done to my credit score (it actually improved it) and on to the stability of a grad student stipend. That broke the cycle…until I had a crazy expensive first few months of 2011. They featured (1) a massive cross country road trip and (2) moving back to New York and getting a new apartment which I totally couldn’t afford, although that is a story for another day. The point is that by April, I was looking at my card balances and really panicking: somehow I’d managed to rack up over $8000 in just a few months. I did not know what I was going to do. It was really scary. But, somewhat to my surprise and despite my low income (thanks to that great credit rating, I guess) I was approved for a new card with an introductory 12-month rate of 0%, accompanied by a 3% balance transfer fee. I promptly transferred $8175 of accumulated debt over, incurring $408 in fees, and took a deep breath. $8583 was a LOT of money, especially then when I was paying NYC rent and making half of what I do now. But even with having to pay the balance transfer fee, I felt better knowing that I wasn’t incurring more interest each and every day.

In the end, I paid the entire thing off; I made the last payment on January 1, 2012, taking 8 months to do it, and never used that card again. Looking at the individual statements, I see that there were a couple of months when I was able to put several thousand dollars in, and other months where I only managed a few hundred. I honestly don’t remember what exactly was going on, but I’m guessing that most of the payoff money came from freelancing in the theater, which I was still doing on the side, and I would have had good and bad months with that.

What I’m really curious about, though, is: was the balance transfer actually a bad idea? Given that I paid the debt off within 8 months, would I have been better off just leaving the debt on my cards and not paying the 3% fee?

Math!

I moved $5475 from an account that had a 16.24% interest rate.

I moved $2700 from an account that had a 13.25% interest rate.

For simplicity’s sake, let’s say I would have paid a flat $1073 every month, even though I wouldn’t have — my biggest payoff month was actually September which means interest would have accumulated through the summer. For simplicity’s sake, we’ll also assume that I’d have paid the minimum on the bigger card while attacking the smaller one first, because I’m absolutely sure I would have thought that way even though it would not have been mathematically sensible. I’m 100% sure I had no idea what my interest rates were anyway.

So, I ran these through a debt snowball calculator, which told me I would have paid $381 in interest if I’d been able to steadily pay $1073 a month for 8 months. According to that figure, I lost $30 by doing the balance transfers.

However, I did not steadily pay $1073 a month. I can’t figure out a way to calculate this that isn’t incredibly tedious, but some of my smaller payments came early on; I paid the minimum of $181 the first month, and in the fourth month I paid $500. So, I’m guessing that in the end the interest/balance transfer fee would have worked out to be just about even, maybe slightly tilting to one side or the other.

But looking back and remembering how freaked out I was by those numbers in my credit card statement…even if I lost the full $30 on the deal, I think it was worth it for the peace of mind. It meant a lot to me to know that I had a full year of breathing space to figure out how to pay the debt from a steady state, instead of constantly watching the interest climb. So I can’t say I regret having taken that step. Good to know.

 

10 thoughts on “Was Playing the Balance Transfer Game Dumb?

  1. It’s impossible to put a price on peace of mind, so it sounds like you made the right call.

    When we had a lot of credit card debt, I played the balance transfer game A LOT. Our balances were so high, it might actually have saved us some money over the long-run., but it definitely temporarily eased my panic over the growing debt total.

    1. thesingledollar says:

      I’m really glad you consolidated — with that many cards/that much debt, moving it around must have been super stressful. Are you making progress on the home equity loan now?

  2. Hannah says:

    If you have debt that you can pay off within a year, it’s usually tough to come out ahead with balance transfers, but that doesn’t mean it’s dumb. By transfering a balance, you gave yourself a strict timeline (12 months) to pay off what was to you a significant chunk of change. Incentives should never be dismissed as unimportant for personal finance. If the problem were purely mathematical then nobody would ever take on high interest debt.

    1. thesingledollar says:

      Truth! I remember just how relieved I felt when I was approved for the balance transfer card.

  3. I believe strongly in peace of mind, and think it’s worth spending a little money. If $30 is all that ended up costing, that’s a bargain! We’re paying off our mortgage as fast as we can, even though it’s only 3.25%, and we’re missing out on potentially larger market gains by doing so. But to us, it gives us a lot of peace to know that we’ll soon be entirely debt-free. Sometimes what’s best for your soul is quite different from what’s best on paper!

    Have a wonderful weekend!

    1. thesingledollar says:

      Yes, I also think I’ll pay off any potential mortgage ASAP — not to the exclusion of all other goals, but more than the minimum. It just feels better to be debt-free. Also, thanks and enjoy yours too!

  4. I think if the peace of mind / sigh of relief had resulted in a less intense payoff process it would have been a bad choice. I think it’s hard to predict if you’ve never been in that situation before. I think I remember from FPU that >90% of people who take introductory rates like you did don’t pay off the balance before the rate resets, which is REALLY terrible for your finances. So for most people I guess it’s a bad idea, but for you it doesn’t seem to have been. I’m glad it worked out for you and it reduced your stress during the year, but it’s the kind of thing you can only be sure of once you’re done with it, so that’s why it doesn’t play into common financial advice.

    1. thesingledollar says:

      Yeah, I was very strongly incentivized to pay it off in time! I definitely would only give it as financial advice to people who are normally fairly stable. If you habitually did it, and didn’t pay the balance off, you could be in serious trouble.

  5. It worked for you, and that’s great. The one caution I would give to anyone in debt is that moving debt around to lower interest mode often has the impact of offering a false sense of security. Fortunately for you, it didn’t. But I have a friend who had her credit card debt consolidated about a year and a half ago so that she would pay a lower rate – and she has now taken up $6,000 of newly available credit card room. Ugh! It’s a common story apparently. I’m glad you were one of the exceptions.

    1. thesingledollar says:

      Truth! I know a lot of people get really screwed up doing this. I was very aware of the risks and very determined not to get caught by them, but a lot of people are not. Your friend’s case makes me sad 🙁 That’s why people recommend closing cards once they’re paid off. I definitely can see the appeal of doing that.

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