How we used balance transfers (very carefully!)

When J and I started our business, we didn’t really know what expenses we were going to have and when we were going to have them.   We used credit cards to finance a good chunk of the start-up costs.   In hindsight, it would probably have been wiser to apply for a small business loan, but at the time we wanted to use what appeared to be the easiest, fastest way to borrow money with the least paperwork.   Also, the business gradually evolved over about a year, where we slowly spent more and more money getting everything up to speed.   There was never a day when we sat down and said “let’s put $38,000 on some credit cards today and start a business.”   But about two years after Jay started the business, that’s about how much debt we had.   It was overwhelming to me, especially with my debt-free history.  

So I sat down one day and made a list of every debt we had, with the outstanding amount and interest rate.   Just having everything written down in an orderly way on a piece of paper made me feel better.   Then I called each credit card company and asked them to lower the interest rates.   Every single one agreed.   But that still left us with interest rates over 10% for most of our debts (we had a few loans that weren’t on credit cards and had lower interest rates).   Fortunately, our credit is very good, so we were getting offers for balance transfers several times a week.   Normally I would just shred them, but I started taking a closer look.   I read the fine print on a bunch of offers, and picked a few that looked good.   We chose one that had a $75 balance transfer fee, but allowed us to transfer $5000 with no interest for over a year.   Considering that we were paying over $40/month in finance charges to have that $5000 on a higher-rate card, we accepted the offer.   Then we made that card a priority to pay off within the year.   Several months later, we found another card that had no banance transfer fees, and would give us 10 months interest free.   We used that offer aswell.  

Within a year, we had our total debt reduced by about half, and we were starting to cancel some of the credit cards we no longer needed.   When we called one to cancel, the friendly rep made us an offer we couldn’t refuse.   Instead of cancelling, we could transfer $4000 to the card, which would remain interest free forever, as long as we made one purchase each month.   That was about 18 months ago, and we still have that card.   We have a reminder on the calendar to made a purchase the first week of each month.   It has to be at least $1, so we go to McDonalds and rent a DVD for $1.08.   Of course, interest gets charged on the new purchase, but the original transfer still has no finance charges.   So now we’re paying interest on about $20 that has been charged to the card since the transfer.   Our finance charge just went up from $0.50 (the minimum) to $0.51/month.   Not a bad deal for a $4000 loan.   We just have to make sure we don’t slip up and forget to make a purchase one month, cause then they can charge pretty much whatever they want.   Since this is virtually an interest-free loan, we only pay $100/month on the principal, and put the rest of our money to work paying off higher rate loans and padding the balance in our IRAs.  

Three years ago, I had no clue how balance transfers worked.   What we learned is that they can definitly save you a good chunk of money on  finance charges, and that not all balance transfers are created equal.   Take the time to read the fine print and choose the card that will charge you the least in transfer fees ($0 is good) and give you the longest time without interest.   And make sure you know what the rate is going up to after the interest-free period.   If you can pay off the whole amount before then, you win!