How to Get Out of Credit Card Debt: Case Study
I recently did a Credit Card Debt Reduction Workshop and I thought I’d share the experience with you guys as a case study. I think that people mistakenly have a lot of guilt and shame around credit card debt and they don’t see a way out. I believe people have credit card debt because life happens. Most credit card debt is because of medical bills or unexpected expenses like your car breaking down and not because you’ve spent on fantastic vacations.
Let me share “Sally’s” situation and the plan that we put together during the workshop.
Sally’s Savings and Debt:
Credit card debt on Mastercard: $12,970 with an APR of 17%
Finished car payments
Paid off student loans
Excellent credit score of 820
Emergency savings of $26,000 (to be used for a car or down payment on a condo) invested in her local bank earning .01% interest
Sally was paying the minimum on her Mastercard and didn’t seem to be making any dent in her credit card debt. Her goal was to pay off her credit card debt and avoid it in the future. This is the plan we put in place:
Transfer Mastercard balance of $12,970 to a zero interest balance credit card with no interest for 21 months and a 3% transfer fee.
A balance transfer lets you move debt from one account to another. Many credit card companies offer zero interest balance credit cards if you have good or excellent credit (usually above 680). There is typically a 3% transfer fee. This is a good idea if you can be disciplined and make the monthly payment and pay off the debt within the timeframe (21 months in this case). If you are not able to, the APR is over 20%.
Pay $1,000 a month to the zero interest balance credit card instead of the current Mastercard.
This approach will pay off Sally’s credit card debt in 14 months and save $1,073 in interest. It includes the 3% transfer fee of $389.00. This assumes that Sally does not make any additional charges during this period.
Should Sally use her savings instead to pay off her credit card?
Sally asked if she should take a different approach and use her emergency money to pay off the credit card debt. I showed her that instead of paying off her credit card debt she could put the $12,970 in a money market account earning 5% interest. In a year she could earn $648. Since doing the balance transfer would cost her only the 3% transfer fee ($389) and she could earn $648 by keeping the savings in a totally liquid money market, she was better off financially by doing the zero interest balance transfer instead of paying off her credit card debt immediately.
The results from this workshop for Sally:
Sally will pay off her credit card debt in 14 months.
By doing the zero balance transfer she will save $1,073 in interest.
By moving her $26,000 emergency fund from her local bank to a money market paying 5% she will earn $1,300 in additional interest.
Sally is well on her way to get out of credit card debt. She is no longer using any credit cards and uses her debit card for all of her expenses.
NOT FINANCIAL ADVICE
The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution.
I’d love any feedback on these articles.
