My debt free journey was filled with money-saving offers, but many turned out to be money guzzlers. So how do you determine which ones to use?
DO THE MATH! It always comes back to the math, because math doesn’t lie! Let’s look at some examples.
I got A LOT of these “0% for 12 month” offers, when I was paying off debt. Most had a balance transfer fee of 3-5%. Then, if I couldn’t pay it off in 12 months, I would begin incurring interest charges on the amount I still owed, including the new debt – the balance transfer fee.
Are they worth it?
Do the math! Add the balance transfer fee to the amount you owe. Can you pay that off in 12 months? If you can’t, it may still be worth it, if the new credit card has a lower interest rate than the old one. But don’t forget to consider the balance transfer fee! Will it be worth it to incur that extra charge? If so, do it! If not, look for a better offer or forget it.
Building your credit score
I often hear of people being encouraged to take on debt, just to improve their credit score. That’s absurd! You’re paying interest on that debt! Don’t fall for the suggestion that you have to carry a balance in order to improve your credit score!
INSTEAD – use your credit card to pay only for things you would purchase anyway, like groceries, gasoline, etc. Pay your balance IN FULL each month! No interest to pay and you’re improving your credit score by building a reliable payment history.
- Don’t use a credit card, if it leads to overspending! Improving your credit score isn’t worth the debt you’ll incur. Calculate the interest payments that go with the debt and I’m sure you’ll agree. If you’re battling overspending and debt, get that under control first, then worry about your credit score.
- Be careful how much credit you’re using. A big part of your credit score is based on the utilization ratio. Using more than 30% of your credit limit on any credit card could negatively impact your credit score.
Rewards & Dividends
Cash back rewards are very popular. But are they really saving you money? I don’t know of any cash back rewards from credit cards for more than 5%. Maybe they’re out there, but do they come close to the average interest rate charge of more than 15%? My guess is no.
Cash back rewards are an added bonus, NOT a reason to spend! If you’re using credit card for bills & expenses within your budget, great! Pay it off each month, skip the interest payments and get your cash back reward. It’s great icing on the cake! But if the idea of cash back rewards are encouraging you to overspend, DO THE MATH! It’s NOT worth it! And NEVER pay an annual fee for your credit card, unless your rewards outweigh the cost! There are plenty of credit cards that won’t charge this fee and the rewards will be less. DO THE MATH! For some, it’s worth it, for others it’s not.
Free checking accounts are everywhere, but some offer to pay dividends in exchange for a monthly fee. It sounds great – “only $5.00 per month and the bank pays me dividends!” Yes, but your average daily balance means you’re only going to get $0.06 per month in dividends! Percentages versus dollar amounts – many will use whatever sounds better to suck you in. DO THE MATH!
I could go all day with these, but the point is to focus on your goals and think through your decisions. Advertisements and marketing pieces are designed to show you the benefits and distract you from the drawbacks.
Make sure you’re advocating for yourself! Ask questions and DO THE MATH before you sign on the dotted line!