Digging Out
LIKE MANY AMERICANS, Sally found herself caught in a whirlwind of unexpected expenses and mounting credit card debt. It wasn't lavish vacations or shopping sprees. Rather, it was veterinary bills for her aging dogs.
I conducted a credit-card debt-reduction workshop for Sally. Here's a glimpse at her finances:
Her Mastercard balance was $12,970 at a hefty 17% interest rate.
Despite that, she had an exceptional credit score of 820.
She also had a $26,000 emergency fund.
Sally was stuck in a cycle of paying just the minimum on her credit card, barely making a dent in the principal amount. Together, we crafted a two-part plan.
First, we moved Sally's card balance to a zero-interest credit card with a 21-month promotional period, albeit with a 3% transfer fee. This move was a game-changer, offering a window of opportunity to chip away at the debt without the burden of accumulating interest.
Second, Sally committed to redirecting $1,000 a month toward the zero-interest credit card. This accelerated repayment plan meant she could bid adieu to her credit card debt in just over a year.
Why didn’t Sally use her emergency savings to wipe out the debt immediately? That was tempting. But by keeping her emergency fund intact and opting for the balance transfer strategy instead, Sally could potentially earn more in annual interest than the transfer fee she'd incur, plus she still had money set aside for emergencies. As part of all this, Sally shifted her emergency fund to a money market account yielding 5%. That allowed her to earn $1,300 a year in interest.
Sally is now focused on paying off the zero-interest credit card debt and not accumulating any new credit card debt.
I conducted a credit-card debt-reduction workshop for Sally. Here's a glimpse at her finances:
Her Mastercard balance was $12,970 at a hefty 17% interest rate.
Despite that, she had an exceptional credit score of 820.
She also had a $26,000 emergency fund.
Sally was stuck in a cycle of paying just the minimum on her credit card, barely making a dent in the principal amount. Together, we crafted a two-part plan.
First, we moved Sally's card balance to a zero-interest credit card with a 21-month promotional period, albeit with a 3% transfer fee. This move was a game-changer, offering a window of opportunity to chip away at the debt without the burden of accumulating interest.
Second, Sally committed to redirecting $1,000 a month toward the zero-interest credit card. This accelerated repayment plan meant she could bid adieu to her credit card debt in just over a year.
Why didn’t Sally use her emergency savings to wipe out the debt immediately? That was tempting. But by keeping her emergency fund intact and opting for the balance transfer strategy instead, Sally could potentially earn more in annual interest than the transfer fee she'd incur, plus she still had money set aside for emergencies. As part of all this, Sally shifted her emergency fund to a money market account yielding 5%. That allowed her to earn $1,300 a year in interest.
Sally is now focused on paying off the zero-interest credit card debt and not accumulating any new credit card debt.
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