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?
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.