As savvy credit card users know, you're not always stuck with the high-interest-rate cards that issuers send your way. With some telephone calls and a few balance transfers, you can often lower your double-digit interest rates to some much more reasonable single-digit numbers.
Many Fools who hang out on the Credit Cards and Consumer Debt discussion board have become masters of this art. If you want to try your hand, make sure to take a look at their advice. They can help you steer clear of any traps and tricks along the way.
Successfully executing this deft maneuver can lead to some questions. Once you've managed to lower the interest rates on your credit card debt, what comes next?
When you're carrying high-interest consumer debt, the pressure's on to pay it off as soon as possible. But lowering those rates drastically can relieve a lot of that pressure, causing an inquisitive Fool to wonder whether it's best to keep attacking that debt. Or, maybe they're finally in a good position to start putting some money where it might be more profitable, so they may wonder whether it's time to start investing.
A new Fool recently posed a question like this on the Credit Cards and Consumer Debt board, inquiring about the best course of action now that he and his wife's credit card debts had all been locked into interest rates ranging from 2% to 5%. He calculated that he would need a pre-tax return of about 8% on any of his investments to make it more profitable than paying off the credit card with the highest interest rate.
If you find yourself in a similar position, you might be interested in what some of the other Fools had to say. (You can read the entire thread, or jump into the discussion, here.) On the whole, many Fools warned the inquisitive poster that he might be making a risky move. Here's why:
Interest-rate risk. You've got great rates now, but will they last forever? One slip could send your interest rate on any or all your credit cards back up to higher rates. The credit card companies may change their terms. You can't be 100% positive that these rates will last forever.
Emergency risk. Often, credit card debt can spiral out of control when an unforeseen emergency comes your way. If you don't have an emergency fund that could cover three to six months of expenses, you should start any savings plan there. Amassing this savings while paying down the credit cards may be a good strategy, even if it's not the most profitable. Having extra money in the bank means you don't have to turn back to your credit cards in case you end up in a financial bind.
Investment risk. What would happen if one day the interest rate on your 3% card shot up to 25%? You'd want to pay the credit card off, right? Having a stash of investments could allow you to immediately dissolve the credit card debt, but you'd be forced to liquidate your investments immediately. If your interest rates climb and your stock values plummet on the same, terrible, terrible day, you may be forced into a decision you don't like.
Spending risk. When you're forced to pay off your debt as quickly as possible, you sometimes find money where you thought you had none. You're highly motivated to watch those balances drop. When you're finally done paying them off, you can turn that financial skill toward finding money to invest. Turn your credit card payments into a regular, monthly obligation, and you may miss a valuable education in stretching your dollars.
- Sanity risk. Making credit card payments until the end of time can sometimes drive an otherwise sane person kind of bonkers. If you kill off those cards, you'll never have to think about them again.
I might add to this list of warnings that you can be certain of your credit card interest rate, but you can never be sure what your investments will reap. It may sound like a winning strategy to aim for an 8% return on your investments, but there's no guarantee you'll hit the mark.
Many of these Fools have learned the hard way that they never want to carry consumer debt, whatever its expense. If you're struggling under the weight of your credit card debt, look them up on the discussion boards. Look, too, to the Fool's Credit Center for more information about the credit industry and strategies for paying down your debt.
Fool contributor Mary Dalrymple welcomes your feedback.