The Chess Game of Debt: How Lenders Predict Your Moves (And How We Can Win)
Growing up I learned how to play chess. I knew the rules of the game and how the pieces move and when someone asks me if I play chess I sheepishly say why yes I do. I enjoy the game and comradery and if they know more than I do about chess I usually lose.
The boys in the house know much more than just the rules and how the pieces move. They know chess notation, various openings, and strategy. Did you know that you can lose a game in three moves? I do now. Just like you can lose a chess game quickly, you can lose the debt game quickly, too.
The boys in the house study me and my moves and predict what is going to happen so that they can win. The same can be said of those who lend out money. They are not bad people, but they are absolutely masters of the financial game, their goal is to predict your moves to maximize their own win. We as Kingdom men, must study their strategy to win our own financial game. Many times, we don’t even know the rules, which is why we must count the cost. Many people make a credit card payment part of their monthly budget strategy. And some want to transfer their high credit card balance to a credit card with a low or 0% APR for transferred amounts.
Recently I received a credit card offer offering me 2% cash back if I opened the card. The card offers 0% interest for balance transfers if paid off in 15 months. I usually dispose of these offers but thought it would be good to run some numbers and situations to see if it would be beneficial to open the card for people who are dealing with high interest debt. I ran a few scenarios including a best cas scenario for $5000 balance transferred paid off in 15 months, a scenario where someone paid for 6 months and then missed a payment, a scenario when in month 9 they decided to purchase $1000 item, and a scenario when they decided to pay just the minimum payments.
Usually we hope and plan for the best case scenario, but many times what happens to us in life does not allow for the best case scenario.
Best-Case Scenario
The best-case scenario for someone who wants to transfer and pay it off over the 15-month period involves taking advantage of the introductory APR and incurring only the minimum balance transfer fee.
1. Initial Balance Transfer Fee
The balance transfer fee is Either or of the amount of each balance transferred, whichever is greater, for the first 90 days following account opening.
Amount Transferred: $5000
4% of $5000: 0.04 x 5000 = $200
Since $200 is greater than $5 , the fee is $200.
The total initial debt is the transferred amount plus the fee: $5000 (Transfer) + $200 (Fee) = $5200 (Total Debt)
2. Best-Case Scenario Payoff (Monthly Payments)
The best-case scenario is that the customer makes equal monthly payments and pays the entire $5200 balance off within the 15-month introductory 0% APR period. Since there is interest for 15 months, no interest will be charged.
Monthly Payment Calculation:
$5200(Total Debt) = $346.67 per month
15 (Months
(Note: The actual payment would be 14 payments of $346.67 and a final 15th payment of $346.62 to equal exactly $5200.)
3. Total Amount Paid
In the best-case scenario, where the entire balance is paid within the 15 months and no late fees or other penalties are incurred:
The total amount paid will be the original transfer amount plus the one-time balance transfer fee.
$5000(Principal) + $200 (Fee) = $5200
Scenario After 6 Months miss one payment.
This scenario is significantly worse than the best-case due to the penalty APR being triggered.
Here is the breakdown of the best-case scenario under this new condition (assuming you incur the maximum late fee and immediately resume making payments to pay off the remaining balance over the 9 months).
1. First 6 Months (0% APR)
2. Missed Payment (Start of Month 7)
The missed payment has two immediate financial consequences:
Loss of Introductory APR: The APR immediately changes to the Penalty APR of 33.24% .
Late Payment Fee: The maximum penalty fee is applied: $38.00.
New Principal: $3119.98(Remaining Balance) + $38.00(Late Fee) = $3157.98
3. Remaining 9 Months (33.24% Penalty APR)
To pay off the new principal of $3157.98 in the remaining 9 months at the Penalty APR of 33.24%, the new required fixed monthly payment would be:
New Monthly Payment: $401.25(Payments for months 7 through 15)
Total Paid in Interest (over the 9 months): $453.30
Summary of New Scenario
👑 Stewardship Reflection: A single late payment—the financial equivalent of a "blunder" in chess—cost this $491.30 in extra fees and interest. Proverbs 22:7 reminds us the borrower is servant to the lender. When we miss a payment, we hand the lender a massive penalty, delaying our financial freedom and our ability to be generous stewards. Consistency is paramount.
More Good Reads:
- The Unwanted Interruption: A Real-Time Lesson in Vigilance
- Why Budgeting is Important for Individuals and for your Family
- Beyond Riches: How Essentialism Unlocks Ture Financial Freedom (and Purpose)
Scenario in Month 9 make a $1000 purchase
This scenario involves making a purchase while still benefiting from the introductory APR on the balance transfer, but it also introduces interest charges on the new purchase.
Here is the breakdown of the financial impact and the best way to handle the payment.
1. Initial Payoff Plan (Months 1-8)
We start with the original best-case scenario where the goal is to pay off the balance transfer in 15 months:
Initial Debt (Transferred Balance + Fee): $5200
Monthly Payment: $346.67
Total Paid after 8 Months: 8 x $346.67 = $2773.36
Remaining Balance Transfer Principal (End of Month 8): $5200.00 - $2773.36 = $2426.64
2. Month 9: The $1000 Purchase
The customer makes a $1000 purchase in Month 9.
APR for Purchases: The offer states the APR for purchases is 19.24% - 29.24%. For the best-case scenario, we will use the lowest end of this range: 19.24%.
How to Avoid Interest on Purchases: The card has a grace period: "We will not charge you any interest on purchases if you pay your entire balance by the due date each month."
The Dilemma (Allocation of Payments):
The crucial factor is the Allocation of Payments clause:
"Allocation of your payments will be at our discretion and generally that means we will apply your payments to the balance with the lower APRs before balances with higher APRs. However, any payment you make in excess of the minimum payment due will be allocated to balances with the higher APRs before balances with lower APRs."
Since the balance transfer has a lower APR (0%) than the purchase (19.24%), any payment up to the minimum due will go to the 0% balance first, meaning interest will be charged on the $1000 purchase.
The Best-Case Strategy:
To avoid interest on the new $1000 purchase, the customer must ensure the payment covers the full amount of the purchase by the due date. Since the payment applies to the higher APR balance only for the amount in excess of the minimum payment, the payment needs to be:
Minimum Payment + $1000
We will assume the Minimum Payment Due is simply the required $346.67 needed to stay on track for the 15-month payoff.
Total Payment in Month 9: $346.67 (Balance Transfer portion) +$1000.00 (Purchase portion) = $1346.67
By making this $1346.67 payment, the full $1000 purchase is paid off, and no interest is charged on the purchase.
3. Remaining 6 Months (Months 10-15)
The customer continues to pay off the remaining balance transfer at the original monthly amount.
Remaining Balance Transfer Principal (After Month 9 Payment):
$2426.64−$346.67=$2079.97Monthly Payment (Months 10-15): (6 more payments)
Total Paid in Final 6 Months: 6×$346.67=$2080.02
(This confirms the balance transfer is paid off, with a few cents extra.)
Summary of Total Amount Paid
Conclusion:
Monthly Payment: The customer would pay the regular $346.67 for 14 of the 15 months, but in Month 9, they would need to make a total payment of $1346.67 to avoid interest on the purchase.
Total Amount Paid: The total amount paid would be $6200.05, which is the original debt ($5200) plus the new purchase ($1000), plus a few cents due to rounding. No interest is paid in this best-case scenario.
👑 Stewardship Reflection: The fine print is a warning! The bank allocated the majority of the regular payment to the 0% balance first. They didn't do this to be nice; they did it to ensure interest would apply to the higher-rate purchase. Our stewardship calls us to be knowledgeable, reading the fine print and budgeting precisely to keep our money working for God's purposes, not the lender's profits. The discipline of making that huge one-time payment is the cost of victory.
Scenario only make the minimum payment for the initial $5000 transfer instead of paying it off in 15 Months.
To analyze this scenario, we must first determine the minimum payment for the balance transfer. Credit card offers don't usually specify a fixed minimum payment formula, but it's typically calculated as the greater of:
A percentage of the balance (e.g., 1-4%).
A fixed small dollar amount (e.g., $25 or $35) plus any interest and fees.
Since the initial APR is 0% , there is no interest charged in the first 15 months. For the best-case estimate, we will use the common minimum payment formula of 1% of the balance plus the amount due for fees/interest. Given the $5200 initial balance and 0% APR, we'll assume a low minimum payment of 1% of the balance or $35, whichever is greater.
1. Calculation of Minimum Payments and Payoff Time
2. After the Introductory Period (Month 16 Onward)
At the beginning of Month 16, the remaining balance will be approximately $4514.40. The APR will switch from 0% to the standard variable rate. For the best-case scenario, we use the lowest standard APR: 19.24%.
Remaining Principal: $4514.40
APR: 19.24% (or 0.016033 monthly rate)
From this point, the minimum payment must cover the interest charged, plus a portion of the principal. The payment will likely remain similar to the $40-$50 range.
Based on minimum payments of 1-2% of the balance, paying off a $4514 balance at 19.24% APR could take over 10 years (120+ months) and result in significant interest.
3. Estimated Totals (Using Financial Calculator)
Using a standard amortization calculation for the remaining debt, assuming a constant minimum payment of 1% of the balance plus interest and fees (or $35, whichever is greater) for the remaining period:
By only paying the minimum, the customer saves $346.67 a month initially but ends up paying an estimated $2,500 in interest and spending an additional 9 years in debt compared to the initial 15-month payoff plan.
When considering using a debt consolidation option like a 0% transfer to a credit card, be wise and realize they know the game better than we do, and they have studied us to know what buttons to push and how they can win the game more often than we will. Because of this some have chosen to not use a credit card at all, which has proven to be a good financial plan for thousands of people.
Would you like to have someone to discuss and create your financial game plan? Let's set the appointment.
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