Robbing Peter to pay Paul (and getting some breathing room)

As I wrote in "Tiny Steps," I had started making slow but steady progress. I watched my
budget carefully and worked hard, applying everything extra to my credit card with the
lowest balance (Visa, starting balance of $9,900). With credit counseling and loan
consolidation eliminated as options, I looked to my dwelling.
Recovery of home prices in north Texas after the 2008 housing bust had been fairly
rapid. My one-story brick ranch, purchased for $165,000 in 2005, was now worth
$182,000. Thanks to a 15-year mortgage at 5% APR, I only owed $129,000. Prime
mortgage rates had dropped to just under 4% in the summer of 2013.
I didn't have stellar credit anymore, but I managed to qualify for a loan for 4%
APR. Not bad. I was allowed to borrow 80% of my home's value ($145,600) in
September 2013. After fees and closing costs, I received $14,000. I used this to pay
down my car ($5,800) and to shrink my credit card debt to
just under $30,000.
Doing so gave me the biggest bang for my buck, freeing up over $350 dollars in my
monthly budget. Additionally, my mortgage payment dropped from $2,050 to $1606. In
under a year I had reduced my unsecured debt by 25.4%. I could now make ends meet
and slowly discharge the debt without working overtime.
While I was still willing to work hard, I was starting to buckle under the strain, falling
ill frequently. Early in 2014, I was diagnosed with a chronic illness.
Rolling debt into a mortgage is not "getting out of debt.” It is simply a reallocation
(Robbing Peter to pay Paul because Peter charges lower interest).
Huettner Capital president Todd Huettner manages a mortgage brokerage firm that
specializes in debt consolidation. Huettner suggests homeowners answer three questions
before combining debt with a home mortgage:
1. Why do you have this debt? As I mentioned in "Stopping the Bleeding,"
consolidation must accompany a change in spending habits (living on a sound
budget). Failure to do so only results in a bigger mess.
2. What are the costs of consolidating the debt? As I noted above, I needed to pay
nearly $2600 in fees and closing costs. I'm now paying that back (with interest of
course). Because I was able to finance to a lower interest rate, I will save money in the
long run (five years-plus).
3. Is there a more effective way to eliminate your debt? If you have less debt, or when
cash-out costs are high, stick with paying the old-fashioned way. While failing to pay on
credit cards may bring a lower credit score and some nasty phone calls, your house can't
be taken. Defaulting on a mortgage or home equity loan is a different matter.
All things considered, this was the best option for me. I needed some breathing room. I
needed to work fewer hours. I needed to take care of me.
Personal finance experts and their proscribed debt fixes are many: Jean Chatzy's “Debt
Diet,” Dave Ramsey's “Financial Peace University,” Suze Orman's “9 Steps to Financial
Freedom.” etc. Rolling debt into a mortgage is not high on the list of recommendations of
any of them. Overall, however, their principles are the same: Reduce your debt and
increase wealth through budget discipline and living within your means. I have taken tips
from each, with Dave Ramsey being one of my favorites. It is my life and my money.
Ultimately I have to do what works for me.

The Amazing Credit Offer

Dear Emily Becher,
 Its easy to save on interest with Balance Transfer checks that come with your Chase Amazon.com account.  
   - Save on balance transfers-Use this offer to tranfer higher-rate blances from other cards to your account.  
   - Save on purchases- use these checks to pay for big expenses or emergencies
   - Of if cash is most convenient- Just write a check to yourself to deposit in your checking account.

Awesome! That sounds great, right? Not so fast. 
I examined the offer closely.  Two blank checks payable through JP Morgan Chase Bank, NA had been supplied. 

   "Promotional 0% APR through billing cycle that ends 08/2015. 

 WTH is APR? I honestly didn't know until I  did a Google search, wading through articles until I found one I could substanitively understand. APR = annual percentage rate of interest, also the cost of borrowing.  That's just another fancy term for interest, right? 
  Well, that's why I thought.  Credit card interest or APR has a number of nuances. Generally, different types of credit applications- Balance transfer, Purchases and Cash  Advance-  have different APRs.  

  "After that, your standard Balance Transfer APR will apply, currently 17.24%."  Currently? So this is a variable rate?    This particular offer sported a generous 0% introductory APR after which an APR of 13.99 % + Prime would apply. What?!!! Prime? Prime Rib? Primetime? 

Prime Rate or Prime Lending Rate - Prime rate is the interest rate charged by bankers to the most credit-worthy borrowers and refers to the Wall Street Journal Prime Rate which is published monthly. This, in turn,corresponds to the Federal Funds rate which is set by the Federal Reserve (Prime Rate is generally about 3% higher). This is why it's SUCH a big deal with Federal Reserve Chairman, Ben Bernacke opts to change interest rates. 
   Let's assume for I used those checks to transfer a balance of $5,000.  I make no payments on the balance until I'm required to do so in August 2015.  Let's further assume that the APR of 17.24% applies and hasn't' fluctuated much over the past 15 months.  What is my current balance and minimum payment? To calculate this we first need to understand the principle of revolving interest. 

 Credit card debt is like a Merry-Go-Round that never stops, with no happy music or Dramamine.  One of the reasons plastic is such a boon for lenders is revolving interest.  Most people are familiar with installment loans (car note, mortgage ect): you borrow a set amount, have a certain interest rate, monthly payment, repayment schedule..blah blah blah.  The payment is calculated by the balance owed, the length of loan term and interest rate. Each payment contributes to the balance, though early in the term a significant portion goes to interest.  
 Revolving interest is slightly different.  The term is unspecified.  The Borrower is allowed use of credited funds up to a certain limit.  A monthly payment (of pure interest) is calculated  by multiplying the balance by the correct (fluctuating) APR and dividing by 12. 
  Er- I think I just made that more confusing! Suffice it to understand that, per theory, you 
could be paying "to infinity and beyond" and never discharge the debt. 
 So, back to my calculations.  With my balance of $5,000, lets find the monthly interest.
  I will multiple by 0.1724.  $5,000 x 0.1724 = $862.  I will now divide by twelve (we're only calculating for one month from an annual percentage rate). $862/12 = $71.83.  Let's then add that to the original balance ($5,000 + $71.83 = 5,071.81) and we arrive at balance of $5,071.83, with $71.83 as our minimum payment, right? Wrong!  
  Looking further down on the credit offer, I noticed a stipulation in much smaller print at the end of the page. 
  "We will begin charging interest on these transactions on the transaction date." Oops! That changes things a bit, huh? Our paltry sum of $5,000 has been collecting interest for 12 months.  So, provided Mr. Bernacke hasn't changed interest rates much, where are we now? Twelve  months of interest on $5,000 at 17.42% APR is $862.  Our current balance is $5,862.  $5,862 x 0.1724/12 = 84.23. 
 Awesome way to save, don't you think? The only way to win at this game is to actually pay it off in full during the introductory period.  Statistically 75% of people fail to do so. 
   I was one of the foolish ones.  I moved my balances among different cards.  I was always planning to pay it off, but without a change in habits, that didn't happen. 
  Getting out of debt is not all about income, expenses, payments and budgeting. I am also working to forgive myself for my foolishness. It's hard to not have regrets. Even though I failed to read that brochure mailed with the credit card (you know, the one with the really teensy print written by the credit company's lawyers and filled with the mumbo jumbo I've tried to translate here), I can't say I didn't have a basic understanding of debt.  I still marvel at how easily I spent money I still don't have for things I never truly needed. 

I Timothy 6:6 "But godliness with contentment is great gain."