The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: KingMe on January 26, 2014, 07:38:38 AM
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I've never done a balance transfer. It never seemed worth it, but I'm considering one and wanted some thoughts on whether the community thinks it's worth it. I usually don't read the checks that credit card companies send, but I was going thru mail today and found checks with a 2% transaction fee and 0% APR until March 2015.
To give you some context, I am not in a debt emergency and using a balance transfer would not be continuing a cycle of debt. My wife and I pay off our credit card bills every month. Other than home loans, we carry no debt and are in a strong financial position. But we do have $38,000 in HELOC debt that was incurred to pay for a renovation. Our plan for 2014 is paying $1,078 in principal and interest per month this year. At that rate, it would take about 3 years from today to pay off the loan.
As I wrote above, a credit card I have is offering $15,000 with 0% APR until March 2015 with a 2% transaction fee. 2% of $15,000 is $300. The interest rate on the HELOC is 4.62%. It's adjustable, but pegged to Federal funds rate, which, even if it goes up, is highly likely to remain fairly low during my payoff period.
I was intrigued, so I did a spreadsheet to identify the potential interest savings. The check limit is $15,000 so I have two scenarios: the status quo (all HELOC at 4.62%) OR balance transfer of $15,000 and $23,000 remaining at HELOC.
My plan would be to apply the lower HELOC interest charge to the principal on the loans. This is about $64 per month, for a total of $1142 in principal and interest that I would put towards the loans. I would be required to make 1% minimum payments on the 0% credit card balance, which would start at $150 and decline to about $130. The rest (about $1000) would be put towards interest and principal on the HELOC.
My analysis shows approximately net $450 interest savings until March 2015 (saved interest minus 2% transaction fee). Because I would be paying more in principal, my total principal would over $2150 less by March 2015. This would result in less interest for the life of the HELOC (amortization calculators show over $235 in lower interest ). So, I'm looking at savings of nearly $800. Lower HELCO interest costs would result in higher taxes, so let's call it $600.
I do feel a little uncomfortable about doing a balance transfer because it seems like a gimmick and I've never done one. On the other hand, it seems like an easy way to save some money with minimal effort.
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I have considered those issues. The credit card balance in March 2015 would be paid off by the HELOC. In other words, I'd use the HELOC to pay off the credit card bill before the interest rate spikes. But instead the HELOC balance being $28,000 (if I just pay off the HELOC), the balance would be around $26,000 because I'd be putting more towards principal.
There would be no retroactive or deferred interest. The bank told me that there is no cost other than the 2% transaction fee and minimum payments until late March 2015. I don't know what happens if I use the card to purchase something, but I'm not concerned because I never use this card.
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One risk is that your bank providing the HELOC reduces your credit limit or something of that nature in the interim.
That seems unlikely if you've got decent equity in the house, and you keep payments up. But if it happens, at the end of this, you could have something like 13,500 on that card and be scrambling to move that elsewhere, or paying credit card interest rates that would quickly surpass any savings.
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It doesn't sound like enough savings to make the risk worthwhile, to me. However, it may be worthwhile to look for a better credit card deal to work with.
Last year my existing Chase card offered me 1.9% for 18 months or so, with zero balance transfer fees. I did some math and felt certain that I could pay off a loan that I had for about 5.4% with the local credit union during the promo period, so I paid off the loan entirely through a balance transfer, and will save about 3.5% on the $7K, which will be paid off when the 1.9% expires. No juggling of multiple loans or lines of credit.
I also just got an AmEx Blue Sky that has 0% interest on purchases for the first 15 months (in addition to a $400 travel credit signing bonus). I am considering using this card to essentially provide some buffer for paying for things I would be buying anyway while accelerating payments on my interest-collecting accounts, knowing that it will be easy to repay the interest free loan before the regular interest rate kicks in in April of 2015, because the Chase account will be paid off at least 6 months prior, leaving me a big surplus after monthly expenses. Bonus is the free vacation I'll get out of the whole deal.
In the past, I wouldn't have tried these types of financial gymnastics, but using Mint, it will be easy to keep track of everything and make sure I'm on track to pay everything off without racking up too high of a bill on the AmEx.
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You can (or could a few months ago) find cards that offer zero-fee balance transfer and 0% interest for a year or so. Check out Chase Slate.
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I'd look at how much I could pay off on that 0% cc before the teaser rate is up while making minimum payments on the HELOC. If the savings weren't enough to bother with then I wouldn't do it. I'd be concerned that for some reason the ability to put more on the HELOC would disappear and I'd we stuck with cc interest doing it your way.
Things are better now in real estate, but several years ago I knew several people whose HELOC ceiling was dropped without notice. One person found out when she went to pay her son's school tuition.