As you know by reading my previous posts, I currently hold a significantly high balance on credit cards. As I set out on my path towards financial independence, I knew that the first challenge I would have to confront would be the credit card monster.
It does not make sense to throw away money on high credit card APRs. At the earliest opportunity, I opened a couple of 0% introductory APR credit cards and transferred the majority of my balances over to them. In most cases, these credit cards offer an introductory APR of 0% for the entire year – More than enough time to allow me to significantly reduce my credit card balances without feeding them outrageous percentage rates.
However, after I had transferred the majority of my debt to these 0% APR cards, I still had approximately $5000 that was sitting on a high interest credit card. Looking at one of my available credit cards, I noticed I had an offer from my Discover Card featuring 7.9% APR + the balance transfer fee (In this case, it was 4% to a maximum of $99). The card that I had $5000 on had an APR of 22%!
Let’s look at some numbers here to see just how much money would be thrown away on the higher balance credit card:
Transferring $5000 to the 7.9% APR credit card translates to the following numbers: A one time fee of $99 + $395 in interest for the year (7.9% – Keep in mind, I am not taking into account the monthly payments that would subsequently reduce this balance along with the associated interest rate. To keep things simple, let’s just use the interest for the year that would be owed at that percentage rate).
Now, take a look at the interest for the $5000 had I kept it on the 22% credit card: $1100!
So, just by transferring my account from a 22% interest rate card to a 7.9% interest rate card, I am saving approximately $600 a year!
As I mentioned, these are not exact numbers – This is not taking into consideration the balance that would be reduced along with each payment.. But you get the idea.
WHY pay these guys more money than you have to? Paying down or paying off high balance credit cards first, or transferring those balances to lower or 0% APR credit cards is an essential step for me if I am to one day achieve financial independence. One thing I was careful to do was to check my free credit score before applying for the new cards, too many applications in a short period of time could damage your credit rating.
Ideally, I should not have any balance on any credit card. But the reality is, I do. To deal with this reality, I have to do all in my power to see that my balances are paying the lowest possible APR.