Options When the 0% Introductory Rate on a Credit Card Expires
Here are the options I have to address this credit card debt:
- Leave it on the credit card: When the 0% introductory rate expires, the interest rate will rise to 7.99% fixed. While that’s a reasonable rate for a credit card, it is significantly higher than I pay on my home equity line of credit (0.5% less than prime) and is not tax deductible.
- Transfer the debt to my home equity: Right now I have about $30,000 available on my home equity line of credit. That means I could transfer all but about $10,000 of the debt, or perhaps request an increase in my line of credit. I should note here that all of this debt (credit cards and home equity) comes from a major remodel of our kitchen.
- Sell investments: I could sell mutual fund investments held in taxable accounts to pay off the debt. This is a tempting option for me, in part, because it would feel great to get rid of this debt once and for all.
- Transfer the debt to another 0% credit card: On paper this is probably the best option, assuming I can find a 0% balance transfer credit card with a long introductory rate term and a high enough credit limit.
Factors to consider before selling investments to pay off debt
So how do we pick the best option? In making my decision, here are some of the factors I considered:
- Taxes: Selling the investments will generate 15% long term capital gains tax on the gain and 5.75% state tax. Because I’ve held the investments for a long time and they have appreciated significantly, the tax burden would be hefty. For example, I own Vanguard’s Emerging Market Index Fund (VEIEX), which has substantially appreciated since I bought it in late 2002. At the present, more than 75% of my investment represents long term capital gains.
- Interest Rates: Next to taxes, this is the primary consideration. If I can refinance the debt at a low interest rate, say less than 5%, that would be my preference over selling investments. If I don’t have access to a low interest rate, however, selling investments to pay the credit card debt becomes much more attractive.
- Convenience: Because I don’t have enough available credit on my home equity to handle the debt, I would need to apply for an increase in my credit line to transfer the full balance. While seeking an increase has become much easier thanks to the Internet than it was even a few years ago, it still takes time and energy. If I can do better through a 0% credit card, not only will I pay less in interest, but the whole transaction will take just a few minutes to complete.
- Human Nature: This is one that gets over looked a lot, but the psychology of money is really important. Knowing myself as I do, I know that if I have available credit on my home equity line of credit, I’ll likely use it. True, I’ll use it to improve my home, which qualifies as “good” debt in my opinion, but I’ll still use it. If I don’t have the credit available, I’ll put off home renovations until I’ve saved the money. This also keeps me from spending more on a renovation than I should. The point is that some debt actually keeps me from getting into even more debt.
Making the decision
So what have I decided to do? Yesterday, I applied for the Discover More Card (read my Discover More Card review). The Discover More card offers a 15 month 0% balance transfer option, and I’ve applied to transfer the entire $40,000 to the card. The online application to about 1 minute to complete and was approved immediately.
I’ll find out in three business days what my credit limit is and how much of the $40,000 can be transferred to the Discover More card. If my credit limit is less than $40,000, then I’ll have to re-review my options for the remaining balance. But either way I will have transferred most if not all of this debt to a 0% credit card for 15 months and avoided the tax liability that would have been triggered had I sold some of my investments.
Have you ever sold investments to pay debt? If so, how did you make the decision and in hindsight, was it the right one?