We encountered a variety of unexpected expenses this year and fell behind on our savings goals, leaving us with a temporary cash shortage. – before the Christmas shopping season even started. This left me in a quandary about how to retire the rather large balance that accumulated in our credit card account.
Is it better to revolve the balance until cash flow improves, use the balance transfer checks that we occasionally get from another credit card account, or dip into our emergency funds? Those were the questions bouncing around in my head.
I thought it might be an interesting exercise to review how we got into this mess, and consider the pros and cons of the three alternatives for digging our way out.
I never expected a fourth strategy – sending a thank you card – would work the best.
How We Accumulated an Unexpected Credit Card Balance
I have been a committed credit card Scrooge for many years. I only put on the card what can be paid back in one month. In fact I have never paid one dime of credit card interest in my entire life – until last month. I paid less than the full balance, and a large amount remains to be paid.
Here’s what happened. We had lots of unexpected expenses:
- We owed much more on our 2011 taxes than estimated
- My daughter got her driver’s license and a job that required an extra car
- My car needed a brand new transmission
- Our air conditioning broke down in the middle of summer
- The cost of maintenance prescriptions for my step-son jumped to $500 per quarter
- Christmas shopping season is upon us
- Estimated tax payments for the business are due January 15 of next year
Revolving a Credit Card Balance Until Cash Flow Improves
One option is to revolve the balance on the credit card giving us some breathing room until cash flow improves. The balance is on a Chase Rewards Card and has an annual interest rate of 12% – a pretty low rate for a credit card. With a balance of $5,000 this translates into $50 per month for the privilege on hanging onto Chase’s money.
Using a Zero Interest Balance Transfer Check
We have a second credit card account with Bank of America – an Elite Rewards Card. Quite frequently they send an envelope full of balance transfer checks, which I promptly throw in the trash. The other day I fished them out of the trash to read through the offers thinking I had found the Holy Grail in my garbage pail.
One check allowed for a zero percent daily periodic rate until September of next year – up to nine months to repay the amount interest free. It sounds great so far.
Then come the other terms more difficult to quantify. The interest rate on existing balances goes to 15.9%, so any purchases made on that card will accrue interest at that rate. We would have to consolidate our spending onto the Chase card to avoid these charges.
At the bottom of the offer description is an innocent looking 4% transaction fee. That equates to $200 on our $5,000 balance. Compare this cost to the monthly $50 to revolve the balance. It takes four months to break even on a zero interest loan that lasts only nine months.
It pays to read documents carefully. You can save yourself a bundle over time.
Dip Into Our Emergency Fund
We maintain an emergency fund for these very occasions. We could easily dip into the fund, pay off the balance and avoid the hassle of balance transfer checks, and the expense of revolving the credit card. The emergency fund is sitting in a savings account earning next to nothing.
But I am reluctant to take this step for two psychological reasons:
Spending becomes a habit. We are at the life stage where we should be saving. We have three teenagers who will be heading off to college very soon. Once we begin dipping into the emergency fund it becomes too easy to justify purchases. Eventually, the savings account may run dry and we would then have to liquidate stocks and/or mutual funds and may face capital gain taxes.
Perceived poverty is a great motivator. Having investments and an emergency cash fund helps you sleep at night, but can lead to complacency. I work harder and smarter when living off only what is left after meeting our savings goals.
The Final Verdict – Send Thank You Cards
I am fortunate to have parents that remember me with a modest check as a birthday gift. In my thank you card, I mentioned the temporary cash shortage and indicated that I would use it to buy food – ha ha! They responded with a much bigger check.
Problem solved – thanks Mom and Dad!
How would you handle the choice if not bailed out by your parents?