Hey everyone, I’m Joshua Rodriguez. Thank you for reading my first article here on KRANTCENTS! Today’s article is inspired by an article that was recently published here on April called “Why You Should Think Twice About Paying Off Debt”. It discussed opportunity cost and its association with paying off debt and investing. In the article, you learned a lot about interest rates and, the cost of time when thinking about long term investments like 401ks
So, you’ve read the article and you are thinking, “Well, I better invest. If 5 years costs me $200,000.00 in the end of things, I need to get this thing started right now!”. Now, you are going to invest your extra funds and make your payments on-time as the bill comes right? Well, this is an incredibly easy concept to stomach when you think about low interest rate loans like student loans, mortgages and more. But, what about high interest rate revolving loans. It can be incredibly hard to think about making minimum payments while paying sixteen percent (16%) interest on your debt.
Let’s go back to how much money 5 years really costs you in the average 401k, depending of course on when you enter and exit the market. The total based on the example used in the article mentioned above $217,996.19. Wow, how much can that do for you when you retire? So, is it a good idea to think about other ways to tackle credit card debts or, loose such a substantial amount of retirement income? The choice is yours!
Now, think about how changing variables like interest rates can make this decision a bit easier on you. Primarily, you want your financial profile to be as progressive as possible, making money for you as fast as possible. To do so, the amount you pay out to borrow money must be less than the amount that you charge to loan your money! The bottom line is, when you make an investment, you are making a loan. A loan that promises growth as the reverse happens when you take out a loan. The key is, coming up with ways to reduce the cost of loans that are higher than what you earn in your investments. Below are 2 great ways to do that.
Transfer Your Balances To Lower Interest Rates
Balance transfer credit cards are not the newest thing on the market but, they are just as productive today as they have been in the past. Balance transfer credit cards allow you to transfer high interest rate balances to new low interest rate credit cards. Most balance transfer credit cards not only offer incredibly competitive interest rates but also offer 0% promotional rates. This opens up worlds of opportunities when it comes to making it easier for you to think of your 401k! If you can pay your debts off playing the balance transfer game, the opportunity cost on your credit cards becomes absolutely zero(0) and using the extra money to invest is a no brainer. But are you willing to make the switch and more importantly will you qualify?
If I’ve got you thinking about using balance transfer credit cards to make investing easier, great! But, there are a couple of things that you will need to think about when making this decision. To qualify for most offers that are worthy of applying for, you will need to have good to excellent credit scores. After all, these cards are designed to win over only the best customers! Why would a lender want to take a loss with 0% rates if they are not sure they are going to win in the future? Credit scores are definitely something to think about.
Another thing that you are going to need to think about when it comes to using balance transfer credit cards is your revolving debt to income ratio. To figure it out, divide your debt by your annual income. The resulting percentage will be your revolving debt to income ratio. When giving loans, lenders also have to think about opportunity costs. This is one of the factors that play into that. The higher your debt to income ratio, the less likely you are to pay off all of your debts. That being said, lenders are more likely to approve you for a balance transfer credit card with a decent credit line if your debt to income ratio is below 15%.
Negotiate Credit Card Interest Rates
An often overlooked option for reducing credit card interest rates is negotiations. The bottom line is, if you are a good customer to the lenders, the lenders know you have options and will do more to try and keep your business. So, lower interest rates on credit card debts could be no more than a phone call away! Although, you won’t generally see a substantial reduction in your interest rates, you will see some kind of reduction in about 50% of your credit card accounts. That is, if you have been a good customer.
So, what qualifies you as being a good customer? The general idea of good borrows! Good borrowers are consumers who make their payments on time, every time. In most cases, this customer pays early! Not only that, a good borrower is someone who doesn’t always send minimum payments. Every once in a while they might just send a little more. They are below 60% of their credit line and haven’t defaulted on their account in any way in the past 12 months. If you are this type of customer, are you going to consider reducing interest rates through negotiations?
Making the decision to pay off debts or use extra funds to increase your retirement portfolio can seem like a hard decision to make. However, by reducing the costs of your loans, the decision becomes much easier to make and your personal financial stability and retirement will benefit from it! Now, it’s up to you to make a plan and put it into action!
About The Author – Joshua Rodriguez
This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance and avid personal finance journalist. Join the discussion with Joshua on Google+!
Photo by: Flkr