Fiscal Friday: Using credit wisely

So recently, I got a few balance transfer checks from the crazy-high interest rate card I stopped using back when I transferred its balance to a low-interest personal loan (more on that here). I thought about transferring part of the balance from the loan back to the credit card, because the checks came with a 14-month 0% interest rate. So I thought hey, I could pay no interest on part of this debt as I pay it off instead of 4%. It seemed like such a great idea!

But then I calculated the balance transfer fee. There is ALWAYS a transfer fee. In my case, it was $5 or a certain percentage (3%, I think?), whichever was greater. I did the math, and the transfer fee was actually GREATER than the amount of interest I'll be paying on this loan before I get it paid off. So no transfer for me.

I did make a different smart credit move this week, though. See, my Kindle died unexpectedly and I was toying with the idea of buying a replacement. And I saw this add on Amazon, touting the Amazon rewards credit card. Signing up got you a $50 gift card, and the card has reward points for purchases too. Signing up for the card meant I'd only pay $20 for a new Kindle! So I did it. And I got approved for a few thousand dollars, which really just blew my freaking mind. But as it turns out, that's actually pretty good for my credit in the long run.

See, my credit card utilization rate automatically went down, because I now have a higher amount of credit to potentially use. But I'm using so little of that credit, and I pay off my cards each month anyway, so that gives my credit score a boost. And the points are a great thing too; I get 3 points for every dollar I spend on Amazon, 2 points for every dollar at gas stations/restaurants/drug stores, and 1 point for every other dollar. Every 100 points = 1 dollar to be spent on Amazon. I've been looking for a points reward card for a while, so the timing on this couldn't have been better.

My plan is to transfer all or most of our utilities bills to the credit card, and to probably make other regular purchases, like groceries and gas, on the card as well. Then, at the end of the month, just pay off the entire card (because I'll have all that money sitting around anyway, because those are all regularly budgeted items). So I'd be making my credit card work for me, and getting Amazon dollars back for just paying my regular bills! Now, to figure out which utilities don't charge an extra fee for paying with a credit card...

Fiscal Fridays: Balance transfers and loans

Would you believe me if I told you I was about to reduce my credit card debt (which, without going into specifics, a few thousand dollars) to almost zero in a week or two? I wouldn't, either. But I am. They're not technically being paid off, but I am transferring the balances on my two Visa cards—which currently have an 18% and 27% interest rate, respectively—to a lower-interest loan.



See, I joined a great credit union back when I bought my car. They gave me an auto loan at 4% interest, which I could hardly believe I qualified for. Then, this week I got a flyer in the mail with details about opening a personal line of credit. With my very-slightly-above-average credit score, I qualified for a loan with a rate of prime plus 2.25%, which works out to be 5.5%, since the current prime rate is 3.25%.

Of course, I consulted my father about my high-balance, high-interest rate cards, and opening a personal loan was actually the first thing he recommended. See, having various types of debt (personal loan, auto loan, credit cards) is somehow better than having all credit card debt. Apparently, having a blend of secured and unsecured debt makes you appear more reliable to creditors, according to my dad.

So I called my credit union and applied. But there was a condition: I have to cut up one of the credit cards. Isn't this bank great? Not only do they give me a low-interest loan to help me manage my debt, but they also crack jokes at the same time. Of course, I had already planned to cut up the 27% interest card. I can't really close it, because closing an account you've had for a few years can hurt your score. But that sucker is already in pieces (see photo above).

The best part? The loan is revolving. That means when I pay the balance down, that line of credit will still be available for me to borrow from. So if I have some sort of emergency—say, I break my leg—I have a little extra backup money available to borrow, at a lower interest rate than any credit card.

I'm just so excited to be in a position to eliminate the balance on these cards. With a lower interest rate, my payments will do more work, instead of just helping me tread water. (On the higher interest card, my monthly interest made up nearly 3/4 of my minimum payment—which was so high, I could barely afford to pay more than that.) My goal? To have that loan repaid in under two years. Definitely doable.

Of course, transferring credit card balances to a personal loan isn't an option for everyone. Commercial banks aren't giving out many personal loans right now because of the terrible economy. And really good credit unions are hard to find—I only am eligible for this one because of the company my dad works for. Another option for some people may be to transfer the balance to a new credit card. Often, there's a 6-month, no-interest grace period when you first open a card, which allows you to make six months' of payments without the added cost of interest.

But take this route with caution. I tried it in college, and wound up maxing out the NEW card as well! (That was the one that stuck me with 27% interest in the end...so not worth it.) Opening a new card and not using it for purchases takes a lot of discipline, and it isn't a good option if you have more than a grand or two on the existing card, in my experience, because it's hard to get approved for a high-limit card if your existing account is maxed out.

So talk to a financial adviser or a trusted person with some know-how to see what options are best for you. And I would recommend against talking to a commercial banker at a place like Chase. They're basically salespeople and will say whatever they can to get you to open a new credit card at their institution.

(P.S. Go check out Emily's blog, Tinfoil Tiaras, at some point today. She's wearing my red Limited skirt as part of the blogger clothes swap I mentioned a while back! And might I add, she looks fabulous.)