I had planned to live life to the fullest this summer and I managed to do so: there weren’t many shows, terrace sessions or vacations that I turned down.
But after a few unexpectedly expensive train tickets in Europe, a few too many concerts, and routine miscalculations of the U.S.-Canadian dollar exchange rate, I was left with a worse credit hangover than expected.
My balance last month was over $4,000. Not terrible, but not great either.
Then this month I was charged credit card interest for the first time in a long time. It was about $80 – the most I’ve ever been charged since I usually pay most, if not all, of my balance each month.
Credit cards have some of the worst interest rates—generally around 21 percent per year. So I immediately transferred my balance to a line of credit with an annual interest rate of 8.69 percent while I pay it off.
But I wondered: What is the most efficient step to take when you start paying a little interest on your credit card? Have I saved as much money as possible? I posed the question to Mark Kalinowski, an education specialist with the Credit Counselling Society in New Westminster, BC
First things first: If you’re wondering whether you should even bother transferring the debt, the answer is yes. “I’m not a fan of anyone ever having debt on their credit card,” Mr. Kalinowski said. Even if it only takes a few months to pay off a debt, the transfer will save you more than $100 in interest.
“Credit cards are a wonderful tool… the problem is that you pay a huge premium for using them when you pay interest.”
In scenarios like mine, Mr. Kalinowski says there are three main options: a credit card balance transfer, a line of credit or a consolidated loan. If you qualify for a credit card and use it responsibly, your credit score is probably good enough for any of these products.
Credit card balance transfers are an offer where a card provider will temporarily give you a zero interest rate on any debt you transfer from your existing credit card. The catch is that you’ll be charged an upfront transfer fee — usually around three percent or less of the total balance — and the interest-free period only lasts about a year.
This is similar to transferring your debt to a line of credit, where you can expect to pay a similar interest rate to mine. If you already have a large amount of equity in your home, that’s even better: With a home equity line of credit, you can qualify for an even lower interest rate.
Both are great options, depending on how high your balance is and how long it takes you to pay it off. In my case, I would have paid about $120 for a balance transfer. That equates to about $30 in interest for the first month on my line of credit, with the interest fees getting smaller as the debt is paid off.
If all goes according to plan, I’ll probably only pay $60 in interest in three months, so the line of credit is clearly the better option for me. Plus, I didn’t want the hassle of having another credit card.
The last option is a debt consolidation loan. This may be a bit over the top for a small amount of debt like mine, but Mr. Kalinowski likes these arrangements because you can’t borrow more while you’re paying off the loan.
This could be a good option for people who might be tempted to continue making payments on their line of credit or credit cards while they pay them off, thus getting caught in a cycle of interest payments. The interest rates on consolidation loans are similar to a line of credit, and they can be paid off in full at any time, Mr Kalinowski said.
