Friday, April 27, 2007

In Response To Fiscal Fred

From a concerned reader:

I don't mean to rain on the parade, but you would be much better off putting that 300$ towards your credit card debt. The return on investment that you get from savings will never be as high as the exorbitant rates that credit card companies charge.

-Fiscal Fred

Dear Fiscal Fred,

That is an excellent point that I’m glad you brought up, seeing as how the topic of my credit card debt has been a hot one as of late.

The answer is No, I would not be much better off putting that $300 towards my credit card debt. Thanks to several very snazzy balance transfer offers (No balance transfer fee and 0 – 2% APR for either the life of the transfer or at least the first 12 months – who’d of thunk junk mail could be so useful!) and some very strategic planning and monitoring on my part (I track all my credit cards in excel to ensure I don’t go past the 12 month intro period and always pay off my “regular” card – the one I put purchases on which is at 7.9% APR – first), I am currently paying close to NO interest on all my credit cards. In my saving account (offered through my local credit union) I earn 5.05% interest on my savings. According to my calculations, I'm coming out ahead here.

Furthermore, with my new IRA, my money is invested in stocks which will conservatively grow at about 8% APY over the long term. AND that growth is tax free! Not just tax deferred like my 401(k), which, hello!, is a total added bonus!

Of course, I still need to pay off my credit cards in a timely fashion to bring my debt to income ratio down so that I can up my credit score and buy a house… but, in my opinion, as long as my interest rates are super low, socking EVERY penny I have into my credit cards isn’t necessarily the best plan of attack.

But thanks for the concern, Fred!

Also, as far as paying off credit card debt goes, which some of you have been asking about lately, I do have some suggestions…

1. ONLINE BANKING WITH AUTOMATIC BILL PAY!!! – ALL of my credit card bill payments come directly out of my checking account EVERY payday… Poof. Gone. Like the money was never even there. Not just once a month. EVERY payday. (Which for me is every week.) I started out just paying $10-$15 towards every card every week to cover the minimum (at the time, I had 7 credit cards!) and paying down the higher interest ones as quickly as possible by dumping extra bucks in whenever I could. Now I’m down to 5 cards… and almost down to 3. (I CANNOT wait!) Online banking saved me and I could not live without it. When the money comes out automatically you barely even miss it.

2. Balance transfer. Balance transfer. Balance transfer! Yes it’s a juggling act. And if you mess up they hit you HARD with high APRs. But if you do it right you can get away with paying very little interest! A few things to consider… watch out for Balance Transfer Fees – I hate them and refuse to pay them unless I sit down and crunch the numbers and decide that they are really worth it. (i.e. paying $75 to transfer $8,000 that was at 18% interest down to a card that had a fixed 0% interest. Duh – that’s a smart move.) Also, remember that every time you apply for a new credit card it’s a (small) ding to your credit score – So be a little choosy about which cards you apply for and how often you do it.

3. Work as much over time as humanly possible. Extra money + no time to spend it = less debt.

4. Post the total on your blog and tell your friends you are working to pay it down. You have no idea how many times I’ve wanted to buy something and then thought – crap… this will make my overall credit card debt go up and I’ll have to admit to the world that I suck.

Ta-Duh! Hope this helps.

Labels: ,