I was determined to live it up this summer. In that, I succeeded: There weren’t many shows, patio sessions or vacations that I turned down.
But after a couple of unexpectedly pricey train tickets in Europe, a few too many concerts and routine misjudgements of the U.S.-Canadian dollar exchange rate, I was left with a worse credit hangover than I expected.
My balance last month came in at more than $4,000. Not terrible, but not great.
Then, this month, I got my first credit card interest charge in a long time. It was for around $80 – the most I’ve ever been charged because I usually pay most, if not all, of my balance each month.
Credit cards have some of the worst interest rates – generally around 21 per cent a year. So, I immediately moved my balance to a line of credit for an 8.69 per cent annual rate while I pay it off.
But it left me wondering: What’s the most efficient move when you start paying a bit of interest on your credit card? Did I save the most money possible? I posed the question to Mark Kalinowski, an education specialist at the Credit Counselling Society in New Westminster, B.C.
First things first, if you’re wondering if you should even bother moving the debt, the answer is yes. “I’m not a fan of anyone ever carrying any debt on their credit card,” said Mr Kalinowski. Even if it takes just a couple months to pay off a debt, you’ll save more than $100 in interest by moving it.
“Credit cards are a wonderful tool... the problem is you’re paying a huge premium to use it if you’re paying interest.”
In scenarios such as mine, Mr. Kalinowski says there are three main options: a credit card balance transfer, a line of credit or a consolidated loan. Chances are that if you qualified for a credit card and used it responsibly, your credit score will be good enough for any of these products.
Credit card balance transfers are a deal in which a card provider will give you a temporary zero per cent interest rate on any debt that you transfer over from your previous credit card. The catch is that they’ll charge an upfront transfer fee – usually around three per cent or less on the entire balance – and the interest-free period lasts only for around a year.
That compares to transferring your debt to a line of credit, where you’ll face an interest rate similar to mine. If you already own a large portion of the equity in your home, even better: You can qualify for an even lower interest rate with a home equity line of credit.
They’re both great options, depending on how large your balance is and how long it’ll take you to pay it off. In my case, I would’ve paid around $120 for a balance transfer. That compares to around $30 in interest for the first month with my line of credit, with the interest charges getting smaller as I pay off the debt.
If all goes to plan, I expect to pay only $60 in interest over three months, so the line of credit is clearly the better option for me. Plus, I didn’t want the hassle of another credit card.
The last option is a debt consolidation loan. This may be a bit of overkill for a small amount of debt like mine, but Mr. Kalinowski likes these arrangements because you can’t borrow more as you pay off the loan.
It could be a good option for people who might be tempted to keep spending with their line of credit or credit cards as they pay them off, putting them in a cycle of interest payments. The rates for consolidation loans are similar to a line of credit, and they can be paid in full at any time, said Mr. Kalinowski.
