Dear Debt Adviser,
Hello, my husband and I have excellent credit scores and are very fortunate not to have any credit card debt. We do have a mortgage left of $58,000 and a HELOC loan of $7,500, which I really want to pay off. I have received a balance transfer offer of 1 percent balance transfer fee for 12 months at zero percent interest. Does it make sense to use one of the checks to pay off the HELOC, with rates of 2.99 percent and 5.62 percent with this offer? I think it does — we also do have a six-month-plus emergency fund. Thanks!
You and your husband do not have any credit card debt because you have managed your finances well, which makes you fortunate, but it’s no accident. Being without credit card debt is not something that someone lucks into, it is a result of advanced planning and most likely a few sacrifices along the way. And for that, you and your husband are to be congratulated.
To answer your question about paying off your HELOC loan with a balance transfer to a zero percent interest credit card, I would encourage you to take a big-picture look at your finances now and your future financial goals. To pay off your $7,500 balance plus the $75 balance transfer fee in 12 months, you would need to pay $631.25 per month. I’m not sure how that compares to your current monthly HELOC loan payment, but you will need to be sure the $631 payment will not cause any problems in meeting your expected monthly obligations.
You have a hefty emergency savings account, but I would feel better about it if the account held 12 months of living expenses rather than six. I know several people who have been unemployed for more than six months in today’s rotten economy. Having a year of a cushion is what I recommend. Plus, the 12-month stash would line up nicely with your 12-month repayment option from the nice people at the credit card company.
There is another matter to consider. What if, for some reason, you are not able to pay the entire balance before the zero percent interest rate offer ends after 12 months? The interest rate would obviously increase to more than what you are currently paying on your HELOC loan.
I recently bought a new mattress. They offered me 24 months to repay at zero percent interest. My response was “no thanks” because this sounded like 24 chances to make a mistake. One missed or delayed payment hiccup, and my interest rate would have been goosed to Herculean proportions, and my interest savings would have evaporated before my eyes.
Your HELOC already has a very low interest rate. Plus, the interest may qualify for a tax deduction, making your rate even lower. For long-term consideration, I would recommend that you continue to add to your emergency account and review your retirement and any other long-term financial goals before restructuring your debt with a balance transfer. It may make more sense to make a larger contribution to your retirement, college, vacation, etc., funds than to pay down your HELOC. The beauty of having a financial plan is you get to manage your money rather than letting it manage you. And keeping your finances simple is always a great management style.
Whatever you decide, keep up the good work.