Money on the Brain: Adding yet another credit card is too risky in struggle with debt
According to Fidelity, the second-most popular financial resolution for Americans in 2022 is to pay down debt. Forty-one percent of survey respondents said that was an important goal for them this year.
I recently wrote about two popular strategies to pay down debt: the Debt Snowball Method and the Debt Avalanche Method. They both have their advantages and can be effective. If you’re not familiar with those strategies, check out my column from Jan. 5.
There are other ways to pay off debt as well, but you have to be careful and smart when evaluating these other methods. Some of them are downright dangerous.
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For example, let’s say you have three credit cards, and you owe them a total of $18,000. You know you should get rid of this debt as soon as possible, but you’re just not sure how to do it.
If you happened to visit CNN’s website recently, you’d see this headline: “Need to get rid of debt? These are the best balance transfer credit cards.”
The article gives the lowdown on six different credit cards. The main selling point for each is that they allow you to transfer debt from other credit cards and enjoy a 0% annual percentage rate for somewhere between 15 and 21 months.
Sounds good, right? Well hold on, let’s think about this for a second.
You’re deep in credit card debt, and CNN says the solution is to get another credit card? No wonder Americans owe credit card companies over $800 billion.
One of the cards profiled in the article is the Citi Diamond Preferred credit card. It offers a 0% introductory APR for a whopping 21 months on balance transfers made in the first four months after you open your account.
This is a great deal, right? After all, if your three credit cards had an APR of 16% and you paid the minimum on them, by the time you paid them off you would have been charged over $11,000 in interest.
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So the Citi Diamond Preferred card will save you $11,000, right? Maybe.
In order for you to save the $11,000 in interest, you would need to come up with a plan to pay off the entire bill before your introductory period is up. You were paying the minimum amount monthly: $360. To pay off the entire $18,000 in 21 months, you’d have to pay approximately $857 each month.
That’s more than twice as much as you were paying. Could you afford those kind of payments? If not, after the 21 months are up, your APR skyrockets from 0% to somewhere between 13.74% and 23.74%.
Of course, the exact numbers will be different for each individual. You can enter the numbers that apply to your situation in the credit card calculator at www.bankrate.com.
The main problem with trying to solve your credit card debt by getting a new card with a 0% APR is it doesn’t solve the main factor that led you to get in debt in the first place: charging new purchases with your credit card every month and not paying the bill in full.
What happens with so many people is this: they get the new card with the great rate, but they continue to charge the same amount of purchases to their old card. Soon, instead of having three maxed out credit cards, they’ve got four, and now they’re in even more debt than before.
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Getting the new card fools your financial brain into feeling like you’ve done something about the problem, when in reality, you’ve just exacerbated it.
The only way a new 0% APR credit card will help you is if you first make a plan to pay above and beyond the minimum payment each month. Next, cut up your old credit cards.
This strategy might make some sense if you follow those two steps, but you’ve got to be super-disciplined about it. If you stray from your plan by splurging on some expensive purchases, or suffer some kind of financial emergency that causes you to put new charges on the new credit card, then you’ll be in trouble.
If you’re in credit card debt, don’t try to solve the problem by getting another credit card, even one with 0% APR. Could it help you? Maybe. But in my mind, it’s just too risky.
It would be far better to use a tried and true strategy like the Debt Snowball or the Debt Avalanche. You won’t risk going even further into debt with those strategies.
Dave Kinzer is a music teacher and a financial coach in Springfield. Contact him at www.davekinzer.com. His column will appear here every other Wednesday.