In 30 Minutes, She Cut Her Credit Card Debt by $3,128
A few weeks ago, I helped a woman I'll call Anna, who attended a financial seminar hosted by my company, MagnifyMoney.com. During our discussion, she asked if the score on a credit card bill was real. She didn't believe she could have such a high score while feeling so broke. We assured her the score was real and could be used to save her money. In 30 minutes, we were able to cut the cost of her debt by $3,128 over the next two years.
Anna, a former teacher who lost her job because of school district cost-cutting, spent a year trying to find a new job. Her new position paid 20 percent less than her previous role.
Anna depleted her emergency fund while living without a paycheck and ended up with $12,000 worth of credit card debt and a lower-paying job. She accrued all of her debt with Discover (DFS), who was charging her a whopping 21 percent interest rate. Anna paid $235 on time, every month. About $210 went to interest.
At her current salary, Anna was working 20 hours per month just to cover her interest bill from Discover. If she continued to pay $235 per month, it would take her almost 11 years to pay back the debt. And she would have paid back a total of $30,352.
Anna asked Discover if it would reduce the interest rate. The firm said no. But she started receiving her FICO score on her statement (ironically, a financial education initiative from Discover). She saw that her score was 770 and couldn't believe it. So, she attended our seminar to get questions answered.
Don't Let Money Myths Keep You From Financial Empowerment
Had Anna not attended our seminar, she would have spent an extra five years of her life working hard just to pay more interest to Discover. But she didn't need to visit us. We didn't work any type of magic. We just gave her the confidence and the information she needed and dispelled seven myths that Anna, like so many people, believe about their credit scores and credit card debt. These myths keep people in bad banking relationships, costing them years of their life.
- I have to be rich to have a good credit score.
- I am loyal to my bank, and my bank will be loyal to me.
- There aren't better deals out there.
- Applying for new credit kills my credit score.
- I was rejected before, so I will be rejected again.
- Balance transfer fees are too high.
- It takes too long to switch.
Myth 1: I Have to Be Rich to Have a Good Credit Score
Anna could not believe that anyone who lived paycheck to paycheck could have a good score. Credit scores measure your responsibility, not your net worth. The steps for a high credit score are remarkably simple:
- Pay on time, every month.
- Don't max out all of your credit cards.
- Repeat 1 and 2.
Myth 2: I Am Loyal to My Bank, and My Bank Will Be Loyal to Me
When Anna called Discover, she rationally explained how loyal and responsible she had been. Then she asked for help. To which Discover promptly responded: no.
So many personal finance experts encourage you to call your bank and ask for an interest rate reduction. You are probably wasting your time.
I used to run the largest credit card issuer in the U.K, and I will let you in on a little secret: the best deals are usually given to new customers. The longer you have your credit card, the worse it usually gets. The introductory period is like the honeymoon. The bank gives you lots of flowers -- like the 0 percent introductory balance transfer. But, once the honeymoon is over, the magic is gone, the flowers disappear, and the costs just keep getting higher.
That means you need a simple strategy: while paying off your debt, stay in the honeymoon. In Anna's case, a honeymoon meant a balance transfer.
Myth 3: There Aren't Better Deals Out There
Anna felt like all credit card companies charge high interest rates, so she did not know where to turn.
We took her to the MagnifyMoney.com balance transfer tool. She entered her information (debt, interest rate, monthly payment), and three money-saving options appeared at the top:
- PenFed offered a 4.99 percent interest rate on balance transfers for four years, with no fee (although it costs $20 to join the credit union: a $15 donation and a $5 deposit).
- Both Santander and Barclaycard (BCS) offered 24 months at 0 percent, with a 4 percent fee.
Anna had a good chance of being accepted with a score above 700. If your score is below 700, you should work to improve it and consider a personal loan in the interim with someone like LendingClub.
Myth 4: Applying for New Credit Kills My Credit Score
Some people obsess over their credit scores. But a score is only worth the savings that it can give you. And a score above 700 usually opens all doors.
Every new application costs you about five to 10 points. So long as you behave responsibly afterwards, you will get those points back in about six months.
Don't treat your score like a trophy. Use your credit score to make banks compete for your business. The only time I tell people to avoid applying for credit is if they want to apply for a mortgage in the next six months. Otherwise, use your score.
Anna was convinced and ready to take advantage of balance transfers.
Myth 5: I Was Rejected Before, so I Will Be Rejected Again
We helped Anna apply for a PenFed Promise Credit Card. Her application was referred. That means she wasn't rejected, but she also wasn't approved. It went to a human being for review.
Anna was disappointed, but she listened to our advice, applied for the Barclaycard offer and was approved for a limit of $7,100.
After we finished the Barclaycard application, PenFed reached out and approved her for $1,000.
We then applied for the Santander credit card, and she was referred. We are still waiting to hear from Santander.
So, $8,100 of her $12,000 of debt could be refinanced. Every bank has its own approval criteria. Just because you have a high score does not mean you will be approved everywhere. And just because you are rejected or referred by one bank does not mean you should be afraid to apply somewhere else.
We decided to apply for three credit cards that afternoon. And we confidently applied for the best three offers. Her score will probably drop from 770 to 740. But, if Anna pays on time, her score will be back in the high 700s in six months.
Myth 6: Balance Transfer Fees Are Too High
So many people are afraid of balance transfer fees and so many personal finance experts warn you about them. They need to stop scaring you.
To transfer the $7,100 from Discover to Barclaycard, Anna will be charged a 4 percent fee. That amounts to $284. On her Discover card, the same $7,100 balance results in over $100 of interest each month. In just three months, the interest charged by Discover would be more than the balance transfer fee at Barclaycard.
Including the cost of the fee, Anna will save about $2,500 over the next two years with Barclaycard. Moral of the story: do not fear the fee. If you can pay off your debt in six months or less, then do not consider a balance transfer. But, if it will take you longer, then the fee should not be a concern.
Myth 7: It Takes Too Long to Switch
We were able to apply for all three balance transfer offers in under 30 minutes. Everything was completed digitally, and the balance transfer is completed by the bank. So, it took Anna 30 minutes to save more than $3,000. That is probably the best-paid 30 minutes of her life.
We told Anna to make sure she completed the balance transfers as soon as she received the credit cards. Most importantly, Anna must continue to pay the bills on time every month. In 24 months, Anna needs to do another balance transfer to stay in the honeymoon, but with a different lender.
%VIRTUAL-article-sponsoredlinks%And during the 24 months, she will make the minimum due on the Barclaycard and PenFed card, paying all of the rest to the Discover card. That way she continues to reduce the balance on the highest-rate credit card.
Like so many people I met, Anna feels comfortable bargain hunting for clothes and food, but this was the first time she looked for a better deal on her debt. Given how much Americans could save, I just hope we can give people the confidence to look for better deals on their existing debt. Remember: the easiest way to pay off your debt faster is to pay less interest to the bank.
Nick Clements is the co-founder of MagnifyMoney.com, a website that makes it easy to cut your costs without cutting your lifestyle. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the U.K.