One of my September goals is to figure out what I’m going to do with the ticking time bomb that is the $11,000 credit card debt I’ve been able to largely ignore for months.
I’ve blogged previously about it, but as a refresher, when I had credit card debt with interest rates as high as 22%, I took a no-fee, 0% credit card balance transfer after signing up for a new credit card. It was great for giving me space to get the rest of my credit card debt under control and even start attacking my student loans.
However, in four months, this 0% credit card debt will turn into 12.65% credit card debt — the sort that can quickly balloon out of control.
I see three options to deal with it:
- Roll over to a new credit card
- Grow, then use my emergency fund to pay it off
- Slow student loan payments to divert spending toward credit card payments until it’s paid off
1. Roll over to a new credit card
I have good enough credit that I could sign up for a new card that would offer me another no-fee introductory balance transfer.
This would be good because I could continue to vigorously go after my student loan debt (see my post on good debt vs. bad debt) and it could save me quite a bit in interest because I’d be turning 12.65% debt into 0% debt.
There are two negatives related to my credit score with this option. In the short-term, it would lower my credit score because of the hard pull necessary to apply for another credit card, but over time, the added availability of credit would more than make up for that ding. The other factor is that having this much credit card debt affects my utilization, which will lower my credit score until it’s paid off.
2. Grow, then use my emergency fund to pay it off
As I’ve blogged about previously, I don’t keep a ton of cash in an emergency fund — around $8,000 — but it’s big enough that it would make a meaningful dent in the credit card debt.
To make that dent even more meaningful, I could start growing the emergency fund between now and December before throwing most of it at the credit card debt before it resets.
The negative with this idea is, of course, that I would be left without an emergency fund for a while, until I built it back up. Also, if I planned on spending it, I’d have to call it something other than an emergency fund.
3. Slow student loan payments to divert spending toward paying down the credit card debt until it’s paid off
This is the least intrusive option. If I picked this option, I’d have to decide in which month to start paying toward my credit card rather than my student loans. The goal, of course, is to pick the payment schedule that adds the least total interest to my payoff. To figure out the least expensive way to deal with it I made this little spreadsheet:
Somewhat counter-intuitively, it turns out that starting to divert payments in November before the balance transfer rate resets, is the cheapest way to do it if I use this option:
I think the decision for now is that I need to look at more factors before making a decision. I think I know the non-rhetorical questions I have to decide on answers to:
- For option #1, is there any value in getting rid of credit card debt rather than student loan debt other than the credit score factors I mentioned above?
- For option #2, how much can I expect to save up between now and December?
- Also for option #2, what is the minimum emergency fund I’d feel comfortable having?
Anyone have any thoughts? This is a bit of a pickle.