CC questions

Kellybeth124 · January 2010

We filed our taxes yesterday and are getting a nice return.

We have 2 CCs that need to be paid off. Card A has a lower balance but a much higher interest rate (27% - went up arbitrarily as I've never made a late payment). Our return would completely pay off A w/ a few hundred $ left over. Card B has a higher balance and is much closer to its limit but the interest rate is definitely lower (15%). Tax return would not pay off B in full but it would pay off 80% of it.

Our plan is to pay off Card A and put the remainder towards Card B. Then we would put the money we have been paying monthly to Card A in a savings account.

Is this the best plan or is there a reason why paying down Card B would be more beneficial?

Leigha12 · January 2010

If you really want to make the best decision, look at how much is being added each month in interest. If Card A's interest payments plus 20% of Card B's interest payments are less than Card B's full interest, then Card B is your choice. Otherwise, definitely stick with the card A.

Sidenote: If you do pay off Card A, consider putting that money toward Card B instead of the savings to pay off Card B even faster.

shagadelk7 · January 2010

I would need exact numbers (exactly how much you own on each card) to give you a correct answer.

stephriz · January 2010

I think the goal in snowballing is to completely pay off one card before heading to another. People start with either the card with the lowest balance or the card with the highest interest rate.

In your case, card A wins on both of those accounts, so you could pay it off (removing that monthly payment) and save on interest.

I agree with your original plan, but someone else may have other input. You could post on Money Matters too. They're not scary over there.

shagadelk7 · January 2010

If you won't say what you owe on each card, figure out how fast you would end up paying off each card. If you decide you want to have them both paid off in 1 year, figure out what card you'll end up paying the most interest on in 1 year and pay off that one first. When you pay off that card, use the extra money you're saving on the payment to pay off the other one quicker.

Kellybeth124 · January 2010

Yeah we owe more than I'm willing to admit to. Being broke in college and making shittastic financial choices bites you in the ass. Blah. I'm 95% sure that w/ the interest rate on Card A it would take longer to pay off. The balances on the two cards are within 1K of each other.

hawkilady · January 2010

If the balances are within $1k of each other, definitely pay off the higher interest rate card first. Get it out of the way completely, but I agree with Leigha, I would consider paying the extra money on the card instead of savings, unless you have no savings. If you dont have any savings, I would follow the plan you outlined to build up an emergency fund of at least 3 months income so you can keep yourself out of trouble in the future.

vhcoleman09 · January 2010

I'd definitely pay card A off first. If you don't have emergency savings for 8 months, I'd put the rest into savings. If you do have savings, I'd pay off card B as quickly as I could.

luckycooky · January 2010

Agree with PP, pay off A first, then put that money towards B, at least until it is at less than 50% of the limit. You are paying 15% interest to get maybe 2-3% on a savings account.

keb270 · January 2010

I agree, pay off the one entire card and then what you can of the other. However, I probably wouldn't put money in a savings account and would pay off the card. My thoughts are that you will only get like 3-4% on a savings account, but will be paying 15% for the card. This means you will be paying more than you are saving. So really, in my opinion it's better to pay down your debt before starting to increase your savings.

Kellybeth124 · January 2010

Thanks for all the advice ladies!

chrissyvcm · January 2010

Being that the two cards are within $1k of each other, and being that you said your refund would pay off all of card A or 80%ish of card B, I did some quick algebra.

If my assumptions on the balances are correct, paying off Card A first will save you the most in interest. You can't argue with the numbers!

As for saving money vs. paying off card B, yes card be is costing you more in interest than you'd be earning in a savings account, but do you currently have savings? If something were to come up (car trouble, out of work, medical bills, etc), would you be okay? Or, would you have to put those expenses on a credit card because your savings isn't built up enough?

Personally, I wouldn't wait until you have several months of a full on e-fund prior to paying off card B, but I would make sure that you have at least a cushion for emergencies. Once you have a cushion that you feel okay with, then dump everything that you can into card B. Once that's gone, then revert back to building a more substantial e-fund.

Junebug060609 · January 2010

Leigha12:

Sidenote: If you do pay off Card A, consider putting that money toward Card B instead of the savings to pay off Card B even faster.

I've been doing this.

sarajoy12345 · January 2010

Just another vote for paying off all of Card A! That interest rate is insanely high.

I would about 90% vote for using the rest to pay off Card B (and also throwing the amount you were paying towards Card A monthly to Card , but that does depend a bit on your current savings and your comfort level there.

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