I was having coffee with a friend this weekend and at some point during our conversation she mentioned how frustrated she was with the interest rate she was paying on an existing credit card from Chase. Now Rebecca is aware of CatholicPF and knew I would not be able to resist digging a little further into her comment regarding her frustration with her credit card. So after asking a few questions here is what I found out:
Rebecca’s Credit Card information –
Credit Limit – $5,000
Current Balance – $3,150
Interest Rate – 24.24%
Interest Charged Last Month – nearly $50 (and she had been paying $50 or more interest the last 3 months!)
I nearly fell out of my chair! Rebecca is a close friend of mine and prior to this conversation I had always assumed she had a solid grasp of personal finance basics. And this was definitely a situation that contained quite a few financial no-no’s. Here was a smart woman with a doctorate degree in a healthcare field, a wife/mother successfully managing the financial challenges of running a household, and from previous conversations I had had with her a prudent retirement planner who’s portfolio includes IRA’s, investment properties and fully funded 401K’s. Yet here was this otherwise seemingly financially savvy friend of mine telling me that she was regularly using (or at least regularly enough to cause her some frustration) a credit card with an interest rate of over 24%. And Rebecca absolutely should be frustrated – her situation with this particular credit card is symptomatic of credit card issues many of us unnecessarily deal with on a regular basis.
First, Rebecca’s credit utilization ratio on this particular card is far too high – she was using over 60% of her available limit. While the objective for all of us should be to work towards maintaining $0 balances (also known as credit card Nirvana), carrying balances over 20% is a definite no-no. While I was most concerned with Rebecca’s APR of 24.24%, I encouraged her to call her card immediately and request a higher credit limit. I encourage any of you who are holding and using credit cards responsibly to do the same thing. Increasing your credit limits on individual cards will not only improve your credit utilization ratio on each of those cards, but the overall ratio of your cumulative credit card balance versus your total available credit card limit. This is a fairly simple step to take and one of those rare requests that most credit card companies are willing to respond positively to.
After Rebecca made this call – I insisted she do so during our lunch – I asked why she was carrying a balance on a credit card with such a high APR. She explained that when she first got the card it had a rate of over 12.99% but that over the past year or two, the company had gradually increased the rate (with a dramatic increase just prior to the credit card reform legislation). Not knowing what to do and intimidated by confronting her credit card company, Rebeccas admitted she had simply tried to ignore the problem. For many of us, this is most likely a very relatable situation. But what I stressed to my friend, and what I want to stress in this post, is that there are always financially smart steps that can be taken when it comes to addressing most personal finance challenges.
In Rebecca’s case the first step that should have been taken is to contact the credit card company and request (or insist for those of you willing to be more bold on the phone) that her interest rate not be increased. In fact, prior to the last few years, I was in the regular habit of calling my credit card companies every 6 months and requesting a lower rate. And you know what, most of the time it worked. I know this seems like such a simple step, but it’s a simple step that most people never take. Rebecca didn’t believe me that her APR was absolutely a negotiable component of her account with this lender.
An important note – credit card companies train their customer service staff and the people answering your phone calls to be experts in the art of “NO”. The scripts that these employees use and are trained with are filled with all sorts of ways to tell you “NO”, keep you frustrated, and encourage you to accept your 24.24% fate or whatever other terms the credit card company deems essential. However, it is your responsibility to not accept “NO” as answer, to not get discouraged/frustrated, and to continue to act as the strongest advocate for your personal financial well being that you can (unless you happen to think somebody else will do this for). Frequently, this means calling multiple times or asking to speak to a manager (or that manager’s manager) – do not be intimidated by this process.
The next step I recommended to Rebecca was to immediately explore 0% balance transfer options. Many balance transfer offers (even today) will provide consumers with the opportunity to transfer an existing balance at a 0% APR for 6-12 months. The catch: there is typically a balance transfer fee of 3-5% of the total balance transferred. In Rebecca’s case this would mean a fee of $94.50 – $157.50 on her current balance of $3,150. And as savvy readers you’ve already done the math and concluded correctly:
With Rebecca’s most recent monthly interest charge of nearly $50, it won’t take too many more months before the monthly interest charges on her 24.24% credit card will surpass what it would cost her to transfer her entire balance to one of the many 0% balance transfer offers available. And for most of us – including Rebecca – these balance transfer offers are likely already available on one or more of our other credit cards.
After we had reviewed the balance transfer offer on her existing accounts, Rebecca chose to transfer her entire balance of $3150 (a very easy process that she completed online in a few minutes) to her existing Citibank card at 0% interest for the next 12 months. Her fee for the transfer was 3% and even better, she also requested a credit line increase on this account and maintained a credit utilization ratio under 20% (even with the transfer).
Three important caveats regarding the 0% balance transfer:
1) Be very leery of utilizing 0% balance transfer offers unless you are certain that you will be able to pay off the entire balance during the promotional period. It is possible that you will find yourself with a higher APR on your new card after the promotional period expires – which of course is not the objective.
2) Be diligent about paying this account (and all of your accounts) on time. These offers typically include clauses that allow credit card companies to dismiss the promotional 0% APR if you are late/miss a payment. Again, the subsequent APR imposed on your account as the result of a late/missed payment might be just as bad or worse than the account you transferred the balance from.
3) Do the math. If you can pay off a high interest rate balance in a relatively short period of time, it may not make sense to pay the balance transfer fees associated with 0% APR promotional offers. In Rebecca’s example, if she were able to pay of the entire balance in two months or less it likely would not have made sense to transfer her balance.
The take away of this post: there are many occasions when it makes sense to utilize a 0% balance transfer offer. And as we have seen with my friend Rebecca, it is important to be proactive in addressing challenges that arise with your personal finances. I’m consistently surprised by the unwillingness of many people to take a few small and manageable steps to save themselves money and improve their financial situation. How many people like Rebecca put off addressing a high interest credit card problem (or any financial difficulty for that matter) for months before they decide to take control of the situation? Are you one of those people?
While Rebecca was able to utilize an existing account to take advantage of a balance transfer offer that made sense, here are links to a few of the best 0% balance transfer offers we found:
Discover More Card – 0% balance transfer offer for 15 months, and 0% APR interest offer on purchases for 6 months. There is a 4% balance transfer fee. You can also earn 5% cash back bonus rewards on quarterly changing purchase categories like travel, home, apparel, gas restaurants, movies, and more. There is no annual fee.
The Citi® Platinum Select® MasterCard® offers a 0% Intro APR Period: 18 months on Balance Transfers*, 12 months on Purchases*. This makes it a great card for people who want the longest balance transfer term or wish to continue making purchases while paying off their current debt at a 0% interest rate. However this card does not offer any specific rewards programs
Chase Freedom Card – No annual fee, Intro 0% APR on balance transfers for 12 months, Intro 0% APR on purchases for 6 months. 5% balance transfer fee, $10 minimum.