How Should I Repay My Credit Cards?

[Well Spent]

Hi everyone,

I've been reading this site for a couple of days and I just joined today. You all seem to have great ideas and so i'm hoping you can help me.

Here's my situation. I'm 29 and in grad school part-time. I work full-time, too, earning about $1,600 a month (net income). I live in the Boston area so my expenses are pretty high compared to other areas of the country.

I have credit card debt that piled up because I paid for school tuition and books using cards.

The total CC debt I have is $3,961 on two cards. $682 is at 10% interest rate and $3,278 is at 0% interest rate until June 2006. (I don't know what the rate will jump to then.

I will not be adding to this debt because I decided to take out federal loans for school that cost a much lower interest rate than the credit cards. I qualify for them due to my low income. I was trying to avoid more loans (my undergrad loan balance is $8,000 consolidated at 4%) which is why I was trying to put my school expenses on cards and pay by the end of the semester (which wasn't possible, I realized).

How should I approach this debt? Should I pay the minimum on the $682 @ 10% while paying as much as I can on the $3, 278? Or get rid of the $682 over the next 2 months and them concentrate on the $3,278? I will not be able to pay them off by June because of my income.

I'm sorry I don't have more info on how much exactly I'll be able to pay towards the debt, but I am still in the process of tracking my expenses for to see where my money goes. Then I will create a budget and know exactly how long it will take to pay off the debt.

Thanks for youe help.

[sweeps]

Welcome WS! I have a few suggestions:

First, I know you were hoping not to take out any more school loans than were necessary, but school loans are a lot less expensive than credit card debt (tax-deductible too!). You may want to think about getting larger school loans if possible to pay of the CC debt. (But don't keep charging on the credit cards, of course.)

Second, you said you don't know what the interest rate on the 2nd card will jump to in June. Time to find out now. It should be on the inserts that come with the credit card. If you don't have those call the company to find out. That's critical information. It's always better financially (although not necessarily psychologically) to pay off the highest-interest credit cards first. Your situation is a little more complicated because you have a 0% promo rate expiring -- we have to know more details to give a definitive answer.

Third, you may want to balance-transfer the $3278 to another promo deal before June. This is an option as well.

[ChillPhatCat]

First rule of thumb is to eliminate the highest interest debt first, it doesn't make sense to keep high interest loans/CC's around, but there are exceptions.

If the rate of the promo credit card after the introductory period is equal to or less than the rate of your $678 debt, then you should kill off the one you're currently paying interest on first. However if the promo card goes to a higher rate things are tricky, and as an added task you should figure out if when the promo period is over are they going to slap you with a charge in the ammount of interest that you would have paid if there was no promo at the end of the introductory period.

If in the case, the interest rate is going to be higher on your bigger debt and you can't pay it off by a significant ammount by june you're going to have to run the numbers through a calculator... Bottom line is that without knowing what the higher card's interest rate will be there is no way to answer this question correctly.

[ChillPhatCat]

Originally Posted by Sweepsplayer

Welcome WS! I have a few suggestions:
Third, you may want to balance-transfer the $3278 to another promo deal before June. This is an option as well.

I agree with this also, if you have 2 or fewer Credit cards it doesn't hurt to get a third, your credit of course will take a small hit temporarily because applying for a new credit card is a sign that you may be preparing to spend large ammounts of money that you don't have, but having 3 cards is a pretty good number in the long run (you don't have to use them you know, just keep them there to look good on your report). If you can bounce the debt to another card that get's a 0% APR for balance transfers for 12 months you'll be sailing smooth.

[Tree0164]

I would pay off the $628 in 2 months if you are able to do that and pay the min on the 10% interest. Once you have paid off the 0% card, you will be able to attack the larger one. I know this goes against the grain of paying the highest one off but the balance is fairly small on it. You can also run the numbers through a snowball calculator to see the best way as well.

Good luck!

[Ima saver]

I would pay as much as I could to the high interest rate card (10%) and minimum to the 0 rate. Hopefully by June you can pay it off and concentrate on the larger cc debt. If you are offered a free transfer to another 0 rate, you should take it.

[Well Spent]

Originally Posted by ChillPhatCat

However if the promo card goes to a higher rate things are tricky, and as an added task you should figure out if when the promo period is over are they going to slap you with a charge in the ammount of interest that you would have paid if there was no promo at the end of the introductory period.

I don't understand this? I've never heard of a charge at the end of the promo period? Can you explain?


Also, I'm at work right now but when I get home, I will check to see what the interest rate will be when the 0% interest promo period expires in June. I'll post so you guys can use that info to help me figure out how to resolve this problem. Thank you.

[ChillPhatCat]

Originally Posted by Well Spent

I don't understand this? I've never heard of a charge at the end of the promo period? Can you explain?

I don't think this applies to newer cards, but some cards used to give you a 0% APR for x amount of months and if you had a balance at the end of that period (lets say it was a year) they'd toss on 10% of the balance left at the end of the intro period (whatever percentage the fixed rate would be).

[baselle]

Originally Posted by Ima saver

I would pay as much as I could to the high interest rate card (10%) and minimum to the 0 rate. Hopefully by June you can pay it off and concentrate on the larger cc debt. If you are offered a free transfer to another 0 rate, you should take it.

I'm with Ima saver on this one, and clearing decks. There's straight economics, and then there is human nature. You are paying 10% on the small debt ccard *right* now. If you do get this licked in 2 months, you will get a nice feeling of accomplishment which will transfer over when you are in the midst of paying off your larger debt. Trust me, it will get you through. And one ccard is always easier to handle and payoff than two.

Also, if you do get this licked in 2 months, it means that you are already used to devoting about 350$ to a credit bill, and if you use the debt snowball technique it means that before June you have 3-4 months, or about $1000 of paying off your one larger debt at 0%.

And avoid debt if at all possible. If you can squeak through this without adding to student loan debt, do so. I was a grad student for 7 years. Luckily as a student in the sciences, I could make do with TAships, etc, and avoid debt and loans. The less debt you have at graduation, the less fear and more choices in the jobs and projects you take on.

[Tree0164]

Originally Posted by Well Spent

I don't understand this? I've never heard of a charge at the end of the promo period? Can you explain?


Also, I'm at work right now but when I get home, I will check to see what the interest rate will be when the 0% interest promo period expires in June. I'll post so you guys can use that info to help me figure out how to resolve this problem. Thank you.

I haven't seen this on Visa or Mastercard but some stores that have credit cards will offer no payment until x amount date and when that date comes they charge you all the interest accured durng the no payment period. Read the fine print.

[Well Spent]

Originally Posted by baselle

I'm with Ima saver on this one, and clearing decks. There's straight economics, and then there is human nature. You are paying 10% on the small debt ccard *right* now. If you do get this licked in 2 months, you will get a nice feeling of accomplishment which will transfer over when you are in the midst of paying off your larger debt. Trust me, it will get you through. And one ccard is always easier to handle and payoff than two.

Also, if you do get this licked in 2 months, it means that you are already used to devoting about 350$ to a credit bill, and if you use the debt snowball technique it means that before June you have 3-4 months, or about $1000 of paying off your one larger debt at 0%.

And avoid debt if at all possible. If you can squeak through this without adding to student loan debt, do so. I was a grad student for 7 years. Luckily as a student in the sciences, I could make do with TAships, etc, and avoid debt and loans. The less debt you have at graduation, the less fear and more choices in the jobs and projects you take on.

Yes, I'm thinking if I could kill the $682 @ 10% over the next 2 months then I would feel great about it and would only have to focus on the $3,278 on one card. I also plan on using the technique of applying those payments that were spread between 2 cards to the remaining $3,278 debt.

I really don't want to take out more student loans but I want to finish my grad degree within the next 3 years. I only earn approx. $1,600 a month (depending on if I can get overtime) in Boston (which is a very expensive area). With my monthly expenses, I can't really pay for school as I go along. I tried to do that and I couldn't so that's why I ended up in CC debt. I was thinking that my loans are subsized by the gov't so I'm not charged interest while I'm in school. I think if I can save every month in an online higher interest savings account (like Emigrant, ING, or HSBC), I will be prepared to pay a huge chunk of the school debt when it becomes due after I graduate. I owe $8,000 in undergrad loan which is in deferment so it's accumulating interest and $3,600 so far in grad loan. Once I kill the CC debt I can put the $$ I was using to pay if off into the online savings account. What do you think of this plan?

[Well Spent]

I checked it out. The interest rate will increase to 11.74% on June 1st (on the 0% interest card with the $3,278 balance.

Does that change your advice?

[ChillPhatCat]

the difference is small, If you're going to pay these off rather quickly I stay with my original answer to get the one you're currently paying interest on taken care of. If the jump was going to be 15% or something like that it'd be a little better to consider tackling the large one.

[sweeps]

WS, do you still plan on charging purchases while you're paying down the credit cards? If that's the case, there is an exception to the pay-off-the-highest-rate-first principle. Most credit cards charge you interest on the current month's purchases when you carry a balance.

Example... I always pay my CC's in full. But once, because of a payment processing error, I unknowingly had a $3 balance on a card. I charged almost $3000 on the card that month. Not only was I charged interest on the $3, but also on the $3000 of new purchases. Ouch. Fortunately I got it taken care of since it was the CC company's fault.

But my point is if you plan on charging to a CC and paying it in full, it is best to use a $0 balance card to do it. For this reason, it sometimes is better to pay off a low-balance, low-rate card in order to free up a card for new purchases.

[Ima saver]

Well spent said they were not going to add anymore to the credit cards, so I think the original suggestion to get the 10% credit card paid off first and then apply both payments to the 0%, even though it is going to go to 11% in June. Hopefully, she will get an offer to transfer to another 0% credit card before then.

[sweeps]

Originally Posted by Ima saver

not going to add anymore to the credit cards

Famous last words.

[acezz4e_tish]

i would say that if you can pay a double payment or close to it, do it, you will save the interest off the rest that went on the principal each payment. say your revolving payment is 60 dollars, if you can pay 120, that additional sixty is all principal, no interest. when the next bill comes is sixty less taxed for interest, each time you do that your prolly saving half what you will pay the long haul. even if you can only pay 80 or 100 thats all on the principal interest free.

[Well Spent]

Hi Everyone,

Here's an update on my situation: I now have $2,200 on one credit card. The interest rate kicks in next month to 12%.

My question is, should I use my tax refund of $1,300 to pay this debt and then pay the remainder of $900 over the summer? I've never gotten this big of a refund so I wouldn't miss it.

But I wonder if I should put some in a savings account for an emergency fund? I have to use my current savings of $1,400 to pay for my summer courses (because my student loans don't come in until the Fall so I have to pay now with my savings).

FYI, my CC debt came from paying tuition before I applied for loans so I'm not concerned about incurring more CC debt after I pay off my current balance. After I pay it off, my goal will be building an emergency fund.

thanks for advice.

[Haku]

What happened? Did you add $2200 to the original CC debts? Or, did you somehow manage to reduce your second CC down to $2200? Please tell me it's the latter.

Anyways, if it was up to me, I would take any and all available funds (including the tax refund), wipe out the first one (which already has a high interest at 10% but a low balance), and then hang on to it as an "emergency fund".

Next, I would throw everything else that's left into the second one (soon to be 12% at $2200) and try to get it as low as possible before the interest rates kick in.

I pray that's all your CC card debts, but in case it isn't, I would pay the minimum on the third until the second is paid off. Once you do that, you can cancel the worse of the first two and hang on to the other as the "emergency fund".

[Well Spent]

$2200 is my entire CC debt (i also have federally subsidized student loan debt). I had started with $3961 debt between 2 cards in January and I've gotten it down to $2200 remaining on one card @ 0% interest until June. If I use my tax refund of 1300 towards it, I will have $900 in total CC debt @ 12%. But I won't have any emergency savings.

Should I use my whole refund toward this debt or split the refund between CC debt and emergency savings?