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    Options to pay off Credit card debt

    So I have just gotten (back) into budgeting and watching my finances closely. With help from forum members I have come to the realization that I may have to reduce my credit card debt load. Here's the current picture:

    Assets
    Primary House Value : 360,000
    Rental House Value : 170,000
    Investments - stocks & Bonds : 174,000
    CDs: 54,000**
    Cash (=EF): 35,000
    Total: 793,000

    Liabilities
    Primary Mortgage: 275,000 @ 3.0%
    Rental Mortgage: 115,000 @ 3.625%
    Credit Cards: 43,000 @ 0% (when is the next rollover that will cost 3% in BT fees?)
    Student Loans: 19,500 @ 6.8%
    Auto Loan: 20,500 @ 3.24%
    Total: 473,000

    Immediate Goal: Eliminate CC debt.

    All my CC debt is @ 0% APR and my credit utilization ratio is right at 15%. I pay 655/mo in just minimum payments towards this debt.

    Option - 1:

    After all my monthly expenses (including CC minimum payments) are paid, I have about $1415/mo left over. Applying this amount towards the debt, I can pay off the debt in a little over 30 months this way. I am reasonably confident that I can continue getting 0% APRs to cycle through during this time.

    Option 1 ummary: Do nothing. Pay off debt in 2 and half years.

    Option - 2:

    Refinance my primary home to a 30 year fixed.

    Current morgage @ 15 yr: 2450/mo (PITI).
    30 year offer right now: 1780/mo (PITI) <-- Loan balance remains same, term 30 years, $500 cash to closing.

    Save 670/mo. I can now apply 2085/mo towards the debt

    Option 2 summary: Refi to 30 yr. Pay off debt in 1 yr 8 months.

    Option - 3:

    Transfer credit card balances to HELOC right away. Eliminiate 36K balance. Payoff 7K using cash. The

    The HELOC has a 10 year draw period. The interest paid is tax deductible. The interest rate is just above prime. (effectively, i.e after taking tax into account) I will pay about 3% in today's interest rate climate.
    Monthly interest only payment is 140. Monthly cash available for debt paydown is 1930. Debt cleared in 18 month (since 7k paid off right away).

    Option 3 summary: Pay down 7k Cash, Use 36K HELOC. Eliminate debt in 1yr 6 mo.

    Option - 4
    Use current cash reserves to pay off all balances right now. The downside is that I always viewed my cash in CDs as a secondary emergency fund. This is gone, and will take 1 yr and 9 mo to replenish.

    Option 4 summary: Pay cash 43k. Be debt free immediately.

    Which option would you choose?

    #2
    I honestly don't know why everyone is telling you to pay off the 0% credit cards ASAP, and ignoring the 6.8% student loans and 3.24% car loan. While neither rate is absurdly high, it makes no sense to me to pay off a 0% debt while still paying interest on other debts. Even if the worst case hits and you don't get a 0% balance transfer offer, you have the money to pay off the credit cards before you're subject to any interest (as in your option #4).

    While it's good that you're looking a time to debt payoff, what you're not considering is the interest you'd pay every month in the process. While there is a small tax benefit to mortgage/HELOC interest, for the most part interest payments represent money you're flushing down the drain. If I recall correctly, switching to a 30-year mortgage would be at a higher interest rate, so by refinancing you're not only extending the time until you pay off your home, you're also paying more interest over the long term. $275K at 3% for 15 years ends up at about $67K interest; $275K at 3.4% (which I think is what I saw on the other thread) for 30 years ends up at about $164K interest -- more than double. (Even at 3% you're more than doubling your interest, at $142K.)

    I understand the need to have a solid emergency fund, but as others have pointed out, you're earning 1.5% on your CDs while you're paying 6.8% on your student loan. (It's the exact opposite rationale for your CC debt, actually.) You could pay off the student loan and the car loan, you'd still have $14K in the bank which is a little over 2 months of expenses. (You also have your $174K in investments if things get dire, as well as your HELOC. Neither are great options, but once you knock out your debt you can rapidly rebuild your EF.)

    If you're really averse to using the CDs, then I'd suggest you apply all your extra to the student loan first, then the car, then the credit card debt. (For example, you'd pay your $225 SL payment plus the additional $1415, for a total of $1640 each month. When the SL is paid off, you'd add $1640 to the $473 on your car, etc.) Using this plan (calculating at www.whatsthecost.com) you'd have the SL paid off in a year, the car in 19 months, and the credit cards in 2.5 years. You'd pay a total of $1,344 interest plus we'll assume one balance transfer fee of $1,290.

    If you do it the other way, and attack the credit cards first, you'd be free of those debts in the same amount of time, but you'd pay $3,570 in interest over the 2.5 years, plus the $1,290 balance transfer.

    Meanwhile, if you pay off the student loan and car right now, and apply those payments plus your extra to the credit cards, you'd have them paid off in 15 months. Then you'd have $2,748 to add to your emergency fund every month. (And your monthly expenses will have dropped by that amount, which means the $14K now represents 4 months' expenses; you'd have a 6-month EF after 3 deposits and a full year in 10 months.) You'd be back up to $54K in 14 months and you'd catch up on the interest you would have made if you'd left the full amount in the CDs. All of this would happen in the same 2.5 years as the snowball/avalanche payoffs.

    So really, I'd say the choices are:

    1. Snowball the student loan, car, and credit cards (in that order). By September 2017 you'd have $0 in debt (excluding mortgages), $56K in your EF, and you'll have paid $2,634 in interest.

    2. Snowball the credit cards, student loan, and car (in that order). By September 2017 you'd have $0 in debt (excluding mortgages), $56K in your EF, and you'll have paid $4,860 in interest.

    3. Pay off the student loan and car now using the EF, and put all of your extra money to the credit cards. By September 2017 you'd have $0 in debt (excluding mortgages), $59K in your EF, and you'll have paid $1,290 in interest.


    Option #3 is the obvious choice to me.

    Comment


      #3
      Almost all 0% cc debt is time limited, usually 18 months or something like that. Then the interest rate goes way high.

      Comment


        #4
        doingitallwrong makes a compelling argument. Since you do have the cash to pay off the credit cards if the worst happens and you can't get another 0% balance transfer offer after this one, you can afford to pay the higher interest debt first.

        So yes, I would probably leave your mortgages alone and do the following:

        * throw all excess at the student loan
        * then throw all excess at the car
        * then throw all excess at the credit cards
        * then save up cash for the next car purchase so you don't have to finance the next one


        I think there's also a case to be made for paying the student loans off first, then paying down the credit cards before attacking the car loan, but that's not based on anything rational like doingitallwrong's analysis of interest costs. It's more that if everything went to heck you could sell the car (assuming you pay it down enough that it's worth more than you owe) but the student loans and the credit card are unsecured debt.

        Comment


          #5
          Originally posted by doingitallwrong View Post
          I honestly don't know why everyone is telling you to pay off the 0% credit cards ASAP, and ignoring the 6.8% student loans and 3.24% car loan. While neither rate is absurdly high, it makes no sense to me to pay off a 0% debt while still paying interest on other debts. Even if the worst case hits and you don't get a 0% balance transfer offer, you have the money to pay off the credit cards before you're subject to any interest (as in your option #4).

          While it's good that you're looking a time to debt payoff, what you're not considering is the interest you'd pay every month in the process. While there is a small tax benefit to mortgage/HELOC interest, for the most part interest payments represent money you're flushing down the drain. If I recall correctly, switching to a 30-year mortgage would be at a higher interest rate, so by refinancing you're not only extending the time until you pay off your home, you're also paying more interest over the long term. $275K at 3% for 15 years ends up at about $67K interest; $275K at 3.4% (which I think is what I saw on the other thread) for 30 years ends up at about $164K interest -- more than double. (Even at 3% you're more than doubling your interest, at $142K.)

          I understand the need to have a solid emergency fund, but as others have pointed out, you're earning 1.5% on your CDs while you're paying 6.8% on your student loan. (It's the exact opposite rationale for your CC debt, actually.) You could pay off the student loan and the car loan, you'd still have $14K in the bank which is a little over 2 months of expenses. (You also have your $174K in investments if things get dire, as well as your HELOC. Neither are great options, but once you knock out your debt you can rapidly rebuild your EF.)

          If you're really averse to using the CDs, then I'd suggest you apply all your extra to the student loan first, then the car, then the credit card debt. (For example, you'd pay your $225 SL payment plus the additional $1415, for a total of $1640 each month. When the SL is paid off, you'd add $1640 to the $473 on your car, etc.) Using this plan (calculating at www.whatsthecost.com) you'd have the SL paid off in a year, the car in 19 months, and the credit cards in 2.5 years. You'd pay a total of $1,344 interest plus we'll assume one balance transfer fee of $1,290.

          If you do it the other way, and attack the credit cards first, you'd be free of those debts in the same amount of time, but you'd pay $3,570 in interest over the 2.5 years, plus the $1,290 balance transfer.

          Meanwhile, if you pay off the student loan and car right now, and apply those payments plus your extra to the credit cards, you'd have them paid off in 15 months. Then you'd have $2,748 to add to your emergency fund every month. (And your monthly expenses will have dropped by that amount, which means the $14K now represents 4 months' expenses; you'd have a 6-month EF after 3 deposits and a full year in 10 months.) You'd be back up to $54K in 14 months and you'd catch up on the interest you would have made if you'd left the full amount in the CDs. All of this would happen in the same 2.5 years as the snowball/avalanche payoffs.

          So really, I'd say the choices are:

          1. Snowball the student loan, car, and credit cards (in that order). By September 2017 you'd have $0 in debt (excluding mortgages), $56K in your EF, and you'll have paid $2,634 in interest.

          2. Snowball the credit cards, student loan, and car (in that order). By September 2017 you'd have $0 in debt (excluding mortgages), $56K in your EF, and you'll have paid $4,860 in interest.

          3. Pay off the student loan and car now using the EF, and put all of your extra money to the credit cards. By September 2017 you'd have $0 in debt (excluding mortgages), $59K in your EF, and you'll have paid $1,290 in interest.


          Option #3 is the obvious choice to me.
          Thanks the detailed calculation. Helps with decision making.

          Now here's how my payments are due:


          137 3/11/2015
          3400 5/1/2015
          1215 5/4/2015
          393 6/7/2015
          4800 8/2/2015
          5000 3/1/2016
          9991 3/1/2016
          11000 3/1/2016
          899 12/5/2016
          3000 5/28/2016
          2021 5/22/2016
          2400 5/1/2016

          Do you think maybe the psychological advantage of eliminating individual debt amounts be better? I think Dave Ramsey recommends this approach right?

          Comment


            #6
            Originally posted by TBH View Post
            doingitallwrong makes a compelling argument. Since you do have the cash to pay off the credit cards if the worst happens and you can't get another 0% balance transfer offer after this one, you can afford to pay the higher interest debt first.

            So yes, I would probably leave your mortgages alone and do the following:

            * throw all excess at the student loan
            * then throw all excess at the car
            * then throw all excess at the credit cards
            * then save up cash for the next car purchase so you don't have to finance the next one


            I think there's also a case to be made for paying the student loans off first, then paying down the credit cards before attacking the car loan, but that's not based on anything rational like doingitallwrong's analysis of interest costs. It's more that if everything went to heck you could sell the car (assuming you pay it down enough that it's worth more than you owe) but the student loans and the credit card are unsecured debt.
            For whatever reason, it's the credit cards that keep bothering me. The student loan debt belongs to DW and she has agreed to pay it off herself. And the logic with the car loan is the same thing. The 3.24% is fixed no matter what until the end of the loan, and I can pay off any time by selling the car. This is why I was thinking of attacking the CC debt first.

            Comment


              #7
              Sorry about this everyone. I just realized that there is a separate Debt section. This thread would have made more sense there. Is there a way to move it there?

              Comment


                #8
                Originally posted by MKKShah View Post
                Is there a way to move it there?
                Ta-dah!
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                  #9
                  If the credit cards are on your mind and you don't mind the $3500 in interest, then I'd pay off the cards in the order they're due.

                  137 3/11/2015
                  3400 5/1/2015
                  1215 5/4/2015
                  393 6/7/2015
                  4800 8/2/2015
                  11000 3/1/2016
                  9991 3/1/2016
                  5000 3/1/2016
                  2400 5/1/2016
                  2021 5/22/2016
                  3000 5/28/2016
                  899 12/5/2016

                  Right now said you've got $2,070 available for this debt repayment. You'll have a little trouble with the three that are due 3/1/16; with rough calculations you'll be about $10K shy of paying those off. If you can cover that, or get another BT for the balance on the $9991 and $5000 (you'll have paid off the $11K), then you'll be on track to pay off all the rest by their due dates. (That's an approximation, of course, since your minimum payments will vary as the account balances change and I don't know what they are now! There may be one or two months where you're a few hundred short, but then you might find ways to throw more at that debt every month, too.)

                  Keep in mind that every month you'll be paying $2,070; minimum payments typically decrease as the balance decreases, so you can't look at it in terms of paying the minimum + $1415 on whatever card is your focus. You need to pay the minimums on all the other cards, and then pay $2,070 less the total of those minimums to your focus card. I use an Excel spreadsheet to track my snowball/avalanche payments, there are I'm sure several online. I have estimates laid out so that I have an approximate payoff date, and then I update the balances and minimums when I get my statements. (The extra payment goes on a separate line.) No doubt there are numerous templates online.

                  Comment


                    #10
                    Option 5: You have enough cash (CD's and EF) to pay off all your non-mortgage debt with $5k left over. Do that and put all the payments towards rebuilding the EF. Then enjoy your debt free life style. And don't spend more than you make again.

                    Just my opinion.

                    Tom

                    Comment


                      #11
                      I agree with tomhole. Pay off all the debt with $5,000 leftover (less any penalties on the CDs). Why keep the CD's when they are PROBABLY making you next to nothing? CD's are horrible investments, but becoming non-mortgage-debt-free is a GREAT investment.

                      Yeah your credit cards are at 0%, but they won't be at 0% forever. And having that $600+ monthly paying around your neck is a cash-flow killer.

                      Once you clear the debts, you will be able to build back that emergency fund in no time! This is a tough decision, I know, however it is the best decision in the long-run. Just don't go back into debt!
                      Check out my new website at www.payczech.com !

                      Comment


                        #12
                        Also -- isn't constantly rolling over to new CC's and opening up new accounts just to get the 0% killing your credit score? Seems like a great strategy to get ahead of the game if it was your only option, but with enough cash saved up in CD's anyway, I'd just kill all the debt straight away.

                        Comment


                          #13
                          Thanks for all your suggestions. Really reassures me that my numbers are correct. I have a resolution.

                          I will only pay minimum payments on all debts through the end of this year. BUT, my goal is to increase my income by at least 10K, and then pay that extra income towards this debt.

                          To summarize my goal:
                          Current CC debt: 43K
                          Debt reduction through minimum payments alone: $7860
                          Balance transfer fee: $645
                          CC Debt at end of year by paying only minimum: $35785

                          Extra income target: $10,000

                          Target debt at end of year: $25,785.

                          I really want this to motivate me to get out of my couch and do something about the CC debt. The habit may stick around after the debts is repaid. It may also offer additional safety.

                          Comment


                            #14
                            Originally posted by TheKayla View Post
                            Also -- isn't constantly rolling over to new CC's and opening up new accounts just to get the 0% killing your credit score? Seems like a great strategy to get ahead of the game if it was your only option, but with enough cash saved up in CD's anyway, I'd just kill all the debt straight away.
                            Nope! I have 43K in CC balances against a total revolving credit limit of $280,000 across all my cards. This comes to about 15.35% credit utilization. So my credit (FICO) score (as of today) is 806. So credit card companies are all over me trying to give me new cards / increase limits etc.

                            I recently spoke to a credit analyst (the person who makes the decision on your card application / limit increase request). She said, my credit profile is one the most attractive ones to make an offer to.

                            - Low credit utilization ration, but still using credit
                            - Absolute debt size compared to annual income is low.
                            - on time payment history

                            They don't care if the available credit limit is high.

                            Comment

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