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Dear Dayana: Visa has told me because I am a high risk (too much debt, but I pay the minimums on time) that they are raising my interest rate to 19% from the current 9% unless I close the account and pay it off at the 9% rate over time. My work owes me $3,000 for travel expenses. I was thinking that I should take $1,000 of that and start a savings account so I can avoid charging anything in an emergency.
I take in a little less than $3,000 a month and pay out $1,100 on my debts, which covers a little more than the minimum payments. After rent and other expenses, I have about $200 left over for food and entertainment. Should I transfer my American Express balance ($4,000) to this Visa and then close both accounts?
-- Signed, I Owe, I Owe in Iowa
Dear I Owe in Iowa,
It sounds like Visa is telling you something. And that something is that it's time to pay the piper.
So let's tackle all the moving parts of your debt equation one item at a time, starting with the balance-transfer offer.
You should probably take up Visa (NYSE: V ) on its 9% offer. Nine percent is always better than 19% when it comes to paying interest. Still, there may be a better deal out there if you care to shop around. (Check out lowcards.com, indexcreditcards.com and cardhub.com to review current offers.)
If your credit score isn't spiffy enough to qualify for a better deal right now, then don't play coy with Visa: Say "yes," but only after checking out the offer. You need to clarify a few things with your friendly customer-service representative at Visa. Does the 9% APR last for the life of the loan -- meaning, is that the interest you will pay until your balance is paid off? You want the answer to be "yes."
Moving your American Express (NYSE: AXP ) card balance over to the Visa makes sense if your Amex interest rate is higher. But before you consolidate your debts on this card, find out if you are even allowed to transfer an additional balance onto the card. You also need to make sure it is subject to the same agreement as your current balance (9% for the life of the loan). And take care to remain within your credit limit with the balance transfer.
Finally, promise that you will pay this bill on time, every time, and break none of their rules. (Don't even jaywalk. I'm not joking.) The moment you flub up, Visa can hike up your interest rate, and it could go much higher than 19%.
This may sound counterintuitive, but keep your Amex account open. And then forget about it. Put it in a block of ice in your neighbor's or mother-in-law's freezer and do not touch the thing. (Having to get dressed, comb hair, and defrost does wonders to curb sudden spending cravings.)
Your idea to start an emergency stash of cash is a good one. But in your situation -- only able to afford minimum payments -- I would use the entire windfall to make a major dent in your debt. If a true emergency arises, you can use the aforementioned soon-to-be-zero-balance Amex card. That's why I suggested that you keep the line of credit open.
Right now, we want to see major progress on paying down the debt. (See the links below for our step-by-step advice.) Let those visions of zero-dollar balances dancing in your head inspire you to pay down the plastic ASAP.
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