A Common Financial Trap We Do to Ourselves

At least three times in the past few weeks I’ve heard a common financial strategy from people with a bunch of debt: I’m going to transfer it from my credit card to my line of credit because the rate is so much less.

Yes, but no: If you believe that the interest rate matters a lot, and that your debt is about math, you’re sort of right. Sure, transferring something from 20% to 6% might be a good idea. But getting into debt, and out of it is, not about math. It’s almost all about psychology. If it were about math we wouldn’t use a 20% credit card, or buy a new vehicle that has dropped $3,000 to $5,000 in value before we get it home!

Remember that transferring your debt around is NOT the same as paying it off. All you’re doing is shuffling it from one place to another, none of which accomplishes a thing in the total amount you owe.

If you owe the money on your credit card, you’ll be way more motivated to pay it off, exactly because of the high rate. If it’s transferred to a line of credit, that motivation goes down the drain. If you do it – fine. But in two years, look back on the math and add up what you’ve paid in total. I’d bet, for most people, it’ll actually cost more since we stretch out the repayment forever.

When we transfer this $1,000 or so, it also pays down our credit card. Hurray – now we have another excuse to use our credit card again because the balance is gone. We tell ourselves the balance is paid off, but forget that it’s just owing in a different place. But six months down the road, the credit card is run up again and we STILL owe the transfer on the line of credit. That makes things worse – way worse than leaving it on the credit card and focusing on paying it off.

I’m not even dealing with the fact that we still think debt is our friend and haven’t wanted to separate our wants from our needs. That has to be true, or we wouldn’t have charged this amount, but saved the money first. Then we can buy whatever it is and actually afford it!

It’s a vicious cycle that credit card companies and our line of credit lender love to assist us with, and keep us in forever. And we’re more than willing to play the game. But it comes at a very high cost in a number of ways.

Break the cycle. Buy it when you can afford it. And if you ignore that advice, which you will, leave it where it’s owing, and get on with paying it off as quickly as possible. That will be quicker, less costly, less likely to run up the credit card again, and less stressful.

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