The perils and the benefits of refinancing debt (but first, the perils)

I had a bad habit in my twenties and early thirties. Practically a ruinous one. And it’s something I see a lot of other people in a similar position get into.

I’d gradually run up debt on a couple of credit cards. I only ever paid the minimum monthly payment — this was before the days where a credit card statement was required to disclose how long it would take to pay the debt off and at what cost, so I kind of saw the minimum payment as a “recommended” one. Also, I always felt I needed every cent of my paycheck (and then some (hence the creeping debt). Paying more than the minimum was a luxury I couldn’t afford (though oddly, I could afford a number of other luxuries like new clothes, restaurant meals, drinks and tickets to shows).

But, as a result of adding more debt while not paying any extra off, those minimum payments would creep up. Having more money going to minimum payments meant less discretionary money, which (since I failed to adjust my lifestyle accordingly) meant even more credit card use.

And so the cycle would continue until even those minimum payments were a real burden. I was always scrupulous about paying on time, but it would get to a point where I feared I’d soon no longer be able to make the payments. Typically a period of frugality would ensue, where I cut out all fun and worked hard to spend as little as possible and maybe put a little bit extra toward the credit cards.

Then, inevitably, an offer would come in the mail for a new credit card. 0% interest for 12 months or some similar offer would be dangled before my stressed-out eyes. I always had great credit, so I’d always get approved for the new card. I’d transfer some or all of my other credit card balances over — sure, 3% of my balance would get added as new debt for the privilege, but it seemed a small price to pay.

My old cards would suddenly have little or no minimum payments. The new card wouldn’t bill me for a month, and when it did, the 0% interest meant a smaller payment than I’d made cumulatively on the balances before.

Suddenly I’d have some breathing room in my budget; money left over in my checking account after paying all my bills. I’d have the best intentions to use all that extra money to start paying down that balance before the 0% period expired.

But somehow, even though I had the same amount of debt that was stressing me out before, having the lower monthly payments just made it seem less of a crisis. I’d loosen up on the spending a little bit. What was meant to be a little break from the frugality simply became my new normal, so that extra money in the checking account would start to get spent instead of sent to the cards.

And then, when I got used to that level of spending, I’d start eyeing my old cards, which now had tiny or no balances on them. Spending a little bit would only trigger a $25 minimum payment; no big deal, right?

And before I knew it, they had balances again. And before I knew it, the 0% period would be up and my minimum payment on the new card would be punishingly high. And I’d cycle through again: going to an extreme of frugality, getting a new 0% offer, transferring balances, spending up the old cards again.

When I finally hit a wall where even I could see that cycle couldn’t continue much longer without missing payments, the fear of default shocked me into a different state of mind. For a long time, I put virtually every extra penny toward debt. (With a few carefully planned release valves of fun, having learned my lesson about overdoing frugality.)

But I did do two more balance transfers to consolidate my consumer debt. One was a credit card with a fixed 3.9% interest rate on transferred balances. Not as good as a 0%, but the fixed rate meant I wouldn’t suffer the fate of having a ballooning payment. The other one was an unsecured loan. At 8.9%, the interest rate was good but not spectacular. The thing that attracted me to it: there was no fee to put my balances on it, it wasn’t a credit card so I couldn’t add to the balance, and there were fixed payments for 60 months, so it would be paid off in 5 years at the latest.

Those two balance transfers really helped me because they not only reduced the number of bills I had but also reduced my monthly interest payments, enabling me to put more money toward debt. And the terms were better for where I was in life, unsure how fast I’d be able to pay down those balances.

But the only thing that ensured it was a good decision to do those two balance transfers was my being serious about getting out of debt once and for all. If I hadn’t been ready, I’d have started spending the newly freed-up credit on my old cards. Nothing can stop that except your will and determination not to do it.

So the only time I’d ever recommend a balance transfer is if you’re so serious about getting out of debt that you would never consider using the old cards (or the extra money in your budget). It’s hard to know when you’re at that point, but using balance transfers repeatedly without being serious about it can be disastrous.

magnifying glass on bills

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