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#1 of 30 Old 04-26-2011, 09:51 AM - Thread Starter
 
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I know about snowballing, and we have been working on getting our balances down, slowly, for over two years now. We've just come into a nice windfall, and although half of it needs to go to our EF (stormclouds), we are planning on sending about 10k to the credit cards. The thinking is that by sending in this huge snowball, it will minimize our monthly expenses, which frankly, are painful.

 

Up to this point, we have been paying off highest interest rate first. However, it occurs to me that it might make sense to go a little out of order. Yes, obviously, the point is to make a dent in the balance...but having the minimums go down is the other goal (in case of a gap in employment). 

 

So (and sorry if this is a stupid question...). If I send in $1000 to pay off a card at 14.25%, I am "free" of a $25 minimum payment. If I send in that same $1000 to a cc with a 12.5% rate but that has a HUGE balance (like $35k huge), wouldn't that extra payment have a greater impact on my minimum payment that is due every month? Or would that balance due only go down about $25 too?

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#2 of 30 Old 04-26-2011, 10:12 AM
 
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In my opinion, what you're thinking makes perfect sense. You might save more money in the long run by paying down the larger balance, but I think you will enjoy increased security by getting rid of a balance and reducing your required monthly payments (in the event of job loss or similar).

 

The math only works if things go a certain way - that you know you will be employed and have no major problems (high medical expenses, etc) during the entire payback period. I prefer to choose security over sheer math.


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#3 of 30 Old 04-26-2011, 10:21 AM
 
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About 6 years ago the federal gov revamped the bankruptcy laws.  During the revamp they changed the way cc could calculate their minimum balances.  CC's now have to charge between 2 - 4% of the outstanding balance and all of the accrued interest for the month as the minimum balance due.  So, if you figured out what % your cc was charging, you could subtract the large payment you want to make, figure out the % and add the interest, you'd be able to tell how much lower your monthly payment would be.  Once you have that information, you'd be able to decide which was better for you. 

 

Another though to consider, having balances on more than one card leaves you vulnerable to more than one companies "whims".  Weather it's raising interest rates, shortening the month, whatever.  Less cards mean less of that.  (And yes, I realize companies are not technically whimsical.  But they do have a great amount of freedom in changing their business practices.)

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I agree with Suze Orman on this.  Pay off the highest interest rate first, even if that means you have more minimum payments.

 

You are thinking about what it costs you MONTHLY, but what you need to be thinking about is your bottom line.  How much will it cost you when it is all said and done?  Getting rid of that $25/month minimum payment may be emotionally liberating, but it may be costing you more per month in accrued interest on the higher interest card... in the end, you could be putting yourself further in the hole, making it take longer to get out of debt.

 

A few weeks ago on the Suze Orman show, she went off (in her usual fashion and without naming actual names) on DR and his snowball method of paying off the lowest BALANCE cards first.  Her method is how you are doing it now, and it is the method that saves you the most money in the long run.  Imagine how liberating it will be when that high rate/high balance card is all paid off.  After that, you can snowball multiple cards at the same time!  However, I will admit that I am not an emotional consumer and don't have revolving credit that is ever NOT paid off, so I can't discount the emotional factor that the DR method appeals to.

 

It's very similar to buying a car because of the monthly payments instead of buying a car for how much it costs.  If you think like that, you'll never get ahead financially.

 

Here's an article that discusses the two methods.

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#5 of 30 Old 04-26-2011, 11:43 AM - Thread Starter
 
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What I am thinking wouldn't be either one of those methods. In essence I am trying to figure out how to lower my monthly minimum payments...get the most bang for my buck. Like laohaire says, I am trying to pad my security gland. My FIL thinks we should sock it all into savings, bcs the last couple of years have been rocky.  And maybe there is some sense in that. But I NEED to get rid of some of this debt, so I want to do it wisely.

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#6 of 30 Old 04-26-2011, 12:02 PM
 
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It looks to me that card with a bigger balance will accumulate bigger debt ( interest payments ) in the future, so try to reduce the bigger balance. Also, keep in mind that interest is charge on the WHOLE outstanding balance and if it 10K outstanding debt with 10% or 1K with 10% (or even 12% or more) then do the math...just my thoughts

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#7 of 30 Old 04-26-2011, 12:05 PM
 
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how  many cc's? what are the balances & interest rates?

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#8 of 30 Old 04-26-2011, 12:21 PM - Thread Starter
 
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Originally Posted by Katwoman View Post

About 6 years ago the federal gov revamped the bankruptcy laws.  During the revamp they changed the way cc could calculate their minimum balances.  CC's now have to charge between 2 - 4% of the outstanding balance and all of the accrued interest for the month as the minimum balance due.  So, if you figured out what % your cc was charging, you could subtract the large payment you want to make, figure out the % and add the interest, you'd be able to tell how much lower your monthly payment would be.  Once you have that information, you'd be able to decide which was better for you. 

 

Another though to consider, having balances on more than one card leaves you vulnerable to more than one companies "whims".  Weather it's raising interest rates, shortening the month, whatever.  Less cards mean less of that.  (And yes, I realize companies are not technically whimsical.  But they do have a great amount of freedom in changing their business practices.)


I called and found out that the card with the huge balance (and huge min. payment) charges 1% of balance + interest or 1.5% of balance, whichever is greater. This info helps with the math.  I was just feeling reluctant to call for whatever reason. But at least now I can make an informed decision  :)

 

I know that it makes sense to pay off highest interest first, but if the min payment is a percentage of the balance and I've got this ginormous balance, I feel like it's something that needs to be taken into account. Thankfully (or not!) this high balance card is pretty close to the highest interest rate, so it's not as much of an issue as I was initially thinking...

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#9 of 30 Old 04-26-2011, 12:38 PM
 
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Originally Posted by cristina47454 View Post

What I am thinking wouldn't be either one of those methods. In essence I am trying to figure out how to lower my monthly minimum payments...get the most bang for my buck. Like laohaire says, I am trying to pad my security gland. My FIL thinks we should sock it all into savings, bcs the last couple of years have been rocky.  And maybe there is some sense in that. But I NEED to get rid of some of this debt, so I want to do it wisely.



But getting the most bang for your buck is paying the least amount of money IN THE END. 

 

Let's say you have $200 in credit card debt at 20% interest, but you have $100 in credit card debt at 10% interest (and I'm going to use those percentages as a "per month" rate, instead of amortized across a year for APR for the sake of simplicity).  If don't pay anything, next month, you will owe $240 and $110 dollars respectively.  $300 of debt becomes $350 of debt.  If you had $100 to pay toward a card, you could pay off the $100, and save yourself $10.  $300 of debt becomes $240 of debt after payment.  But if you had paid $100 toward the higher interest card, you would have saved yourself $20.  $300 of debt becomes $230 of debt after payment.  This is a super simple example, but the principle is the same.

 

So, you really have to sit down with all of your credit cards and interest rates and figure out what will cost you the least in the long run, when it is all paid off.  You have to change your mindset from "monthly minimum payment" to "what will it cost when the bill is paid off".  If your amounts are anything like the "hypothetical" ones you mentioned in your OP, then this could amount to THOUSANDS of dollars saved or thrown away.

 

I think one of the things that calculating it like this does, it that it can shift the way one look at purchases.  If you are not going to pay your balance each month, then that item that you just purchased on your credit card all of the sudden becomes much, much more expensive.  The $20 shirt is really costing you $35.  The credit card debt of $1000 is really costing you $1450.  I hope I'm making sense because it really does matter in the long run.  Good luck, however you decide to deal with this.

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#10 of 30 Old 04-26-2011, 01:23 PM
 
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velochic, I COMPLETELY understand what you're saying and I cannot stand DR** (LOVE Suze).  But I also know that removing a payment is a huge burden lifted.  Is it the long-term winner?  That depends... on whether your income remains the same.  If your income drops and you can't make both minimum payments--then you're screwed.  When your money is tight enough to squeek, then you have to look at tactical (short-term) vs. strategic (long-term) for a while.

 

So yeah, $200 in debt at 20% interest would have a min payment (based on the OP's bank of 1%+interest) of $5.33 (of which $3.33 would be interest) and the $100 in debt would have a payment of $1.83 bringing your total monthly payments to $7.16.  If your income drops such that you go from having $8/mo to pay down debt to having $6/mo and you're carrying both cards--you're screwed.  At that point, what's more important?  The long-term interest you pay on the higher interest rate card, or the credit report and potential collections agency problems you're going to have with the smaller card that you could've paid off--ya know?

 

But I agree that the OP needs to sit down and really look at the balances and interest.  In velochic's example, the numbers were exaggerated; and the higher balance card had the higher interest rate--and interest rate double the smaller.  If the interest rates were closer together, then paying off the smaller one to remove a payment isn't going to have the same kind of long-term impact and paying it off to remove some of the required monthly burden may be worth the long-term savings.  And while I'm so NOT a fan of DR**, I think in this case, you DO need to consider how removing the smaller debt would enable you pay off the larger one quicker.  Look at the overall costs (without considering the risk factors involved) of doing either.  It's possible that any money you might save by focusing on the larger debt would be relatively equal to paying off the small one and rolling it's monthly payment into the larger one's payments to pay it off quicker with the money you are no longer sending to the smaller one.  Did that just make sense?

 

I just think that in situations where there is potential job loss looming, you have to look at more than just the hard numbers.  They are absolutely something you need to look at because sometimes the differences are monumental and outweigh certain risks; but I think that the non-monetary risks need to be considered, too.

 

JMO

 

**ETA:  I don't mean to sound like I'm bashing DR.  I think for people who are just getting a handle on their budget and finances, he's a wonderful eye-opener and gives you a good place to start.  I believe his snowball method is very necessary for some people if only for the motivational value--I've been there (and I hate that he's deemed the "father" of this method as I did it for myself 20 years ago having never heard of him).  But I have been on finance boards for a long time and the DR mindset that all debt of every single type including a mortgage is a horrible thing is where I diverge from his theology.  At one point I had to stop co-hosting a board elsewhere because the DR contingent there was just vicious and not open to theories other than DR--all others were "dangerous".  >:(  Suze Orman is for people who have discipline.  DR can work even if you don't.  There are many advisors out there.  No one of them appears to have ALL of the answers.  Please keep an open mind and review all their information and really chew on it.


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#11 of 30 Old 04-26-2011, 01:51 PM - Thread Starter
 
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Thank you for your input, and specifically for throwing me examples framed in simple numbers.  I get a brain cramp when it comes to calculating this stuff on such a huge scale. I "understand" the way the two different snowballs work, I just keep thinking that when all your other balances are relatively dinky, and then  you have a card with an ENORMOUS balance, the rules might somehow change and scew the numbers. For the sake of the exercise, I have:

 

$3000 at 16.25% (min pay $130) - this is a blended rate card, the remaining balance is at 0%

$1000 at 15.99% (min pay $160)  - this is a blended rate card, the remaining balance is at 1.99%

$850 at 14.25% (min pay is $20)

$40k at 12.15% (min pay is $850) - OUCH (the card rep said that if I pay 5k, min payment will come down to $725, if I pay it down 10k, it will come down to $615)

 

I get that it makes sense to pay down the higher rates first, but that $850 payment is PAINFUL, and we often are waiting for a paycheck to clear so we can pay it (has to do with where it is due in the month as well as how large it is). The other ones get paid without a problem, as a couple of hundred dollars here or there are not usually a stressor.

 

So although I understand that the point is to pay the least in the end, I find myself wondering whether, like heatherdeg suggested, I should be considering the short term benefits in this situation - esp since dh JUST started this job, and who knows how stable it actually is...

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#12 of 30 Old 04-26-2011, 02:02 PM
 
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I don't mean to derail your thread, as you just asked about which cc to put the payment towards.  But have you thought about some sort of consolidation loan?  Roll that 40k into something with a more reasonable interest rate?  Normally, I wouldn't suggest a second on a house, but it does seem like a "regular" loan might garner you a better interest rate or a better minimum payment.  We financed 30k at 8% (I think, might have been 9%) o 15 years and ended up with a $315/mo payment.  Just a thought......

 

Of course you don't need to take 15 years to pay it off.

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But how much is on the blended cards TOTAL and when do those promo rates run out?  That's another big deal.  What are the remaining balances?  Exactly how many cards would $10k actually pay off and free up minimum payments on?

 

You have some serious number crunching to do.  I'm going to assume that you've already negotiated rates or settling the debt on that big card with the cc company?


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#14 of 30 Old 04-26-2011, 02:12 PM - Thread Starter
 
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Those low rates are life of loan rates...something you NEVER see anymore, I don't think. I know that big card is a scary number. We're just going to pay it off. We've managed to keep our credit score high, even though our income has been rocky.  We've never missed a payment or been late. I don't want to start messing with that now. We're hoping to have it all paid off by next year. And then we can start saving for a down payment. I'm hoping to BT some of the huge cc once I free up some of the other cards. 

 

(if you think I am misguided, please feel free to say so!)

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#15 of 30 Old 04-26-2011, 02:40 PM
 
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Quote:
Originally Posted by cristina47454 View Post

Thank you for your input, and specifically for throwing me examples framed in simple numbers.  I get a brain cramp when it comes to calculating this stuff on such a huge scale. I "understand" the way the two different snowballs work, I just keep thinking that when all your other balances are relatively dinky, and then  you have a card with an ENORMOUS balance, the rules might somehow change and scew the numbers. For the sake of the exercise, I have:

 

$3000 at 16.25% (min pay $130) - this is a blended rate card, the remaining balance is at 0%

$1000 at 15.99% (min pay $160)  - this is a blended rate card, the remaining balance is at 1.99%

$850 at 14.25% (min pay is $20)

$40k at 12.15% (min pay is $850) - OUCH (the card rep said that if I pay 5k, min payment will come down to $725, if I pay it down 10k, it will come down to $615)

 

I get that it makes sense to pay down the higher rates first, but that $850 payment is PAINFUL, and we often are waiting for a paycheck to clear so we can pay it (has to do with where it is due in the month as well as how large it is). The other ones get paid without a problem, as a couple of hundred dollars here or there are not usually a stressor.

 

So although I understand that the point is to pay the least in the end, I find myself wondering whether, like heatherdeg suggested, I should be considering the short term benefits in this situation - esp since dh JUST started this job, and who knows how stable it actually is...


If you pay down the $40k by $10k (the amount you have to work with), you save $235/month in minimum payments.

 

If you pay all of the 3 smaller ones off plus use the remaining $5k to pay down the large one, you save $435/month in minimum payments.  You will have the one large payment, but instead of paying $1160/month total, you will be paying $725.  So, in the end it turns out that not only will paying off the highest interest cards save you money in the long run, but it will make your monthly payments lower, too.  At least that's how it works out with the numbers you gave.

 

Oh, and please, please, please don't trade unsecured debt for secured debt by paying credit cards with a home equity loan.  That is like... a cardinal sin, financially.  Especially if you are on financial rocky ground.

 

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#16 of 30 Old 04-26-2011, 04:13 PM - Thread Starter
 
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The math isn't quite accurate....once the numbers I posted are paid off, there will still be balances left on the first two cards, just at negligible interest rates.  So the minimums might go from $160 to $60...something like that. I did some rough math and that's about where it lands.  I'm going to call Discover tomorrow just to make sure my math is in the ballpark.

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#17 of 30 Old 04-26-2011, 07:10 PM
 
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I would pay off the three smaller debts, then throw the rest at the larger one. I prefer to simplify - less bills to pay, less debts to pay. Less things to worry about - I have enough to worry about as it is. I would completely pay off the 3 smaller debts, then they are gone and you don't have to think about them again. When you free up $435 a month in payments that $850 payment wont seem as difficult.

 

There are pros and cons to snowballing high interest first or snowballing smallest debt first. If I were in your shoes, with stormclouds on the horizon, I would want to minimize the # of bills I had - then if things do get rough, you only have to worry about making one payment. If you can't make any payments, then it's only one ding on your credit report, not 4.


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#18 of 30 Old 04-26-2011, 08:26 PM
 
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I would pay as much as possible on the highest interest rate card, if that card is paid in full then go to the next highest rate card and work my way down.- like other posters have said for the same reasons.  Apply any 'freed' up monies to the next highest card for snowballing via susie orman  method.


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#19 of 30 Old 04-26-2011, 08:54 PM
 
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Quote:
Originally Posted by velochic View Post




If you pay down the $40k by $10k (the amount you have to work with), you save $235/month in minimum payments.

 

If you pay all of the 3 smaller ones off plus use the remaining $5k to pay down the large one, you save $435/month in minimum payments.  You will have the one large payment, but instead of paying $1160/month total, you will be paying $725.  So, in the end it turns out that not only will paying off the highest interest cards save you money in the long run, but it will make your monthly payments lower, too.  At least that's how it works out with the numbers you gave.

 

Oh, and please, please, please don't trade unsecured debt for secured debt by paying credit cards with a home equity loan.  That is like... a cardinal sin, financially.  Especially if you are on financial rocky ground.

 



 



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I would pay as much as possible on the highest interest rate card, if that card is paid in full then go to the next highest rate card and work my way down.- like other posters have said for the same reasons.  Apply any 'freed' up monies to the next highest card for snowballing via susie orman  method.



ITA with these two posts.  It looks like paying off the higher interest cards would give you both more long and short term relief!

 

 


 

 

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#20 of 30 Old 04-26-2011, 10:00 PM
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Velochic is right. Paying off the higher rate cards saves you money in the short and long term. It sounds like the issue is that it's one large payment, so I would pay of the three other cards and throw what's left at the big debt, and then start automatically transferring a set amount per paycheck into an account designated for paying that bill, so when it comes due the money will be there. You also should be able to pay more than the minimum now, and that will save you money over the long run as well as lower your monthly required minimum.

 
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#21 of 30 Old 04-26-2011, 10:24 PM
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I do agree with DR on this - even if for long term finances it makes sense to pay off the highest interest first, there is some satisfaction that comes from paying off a card entirely. If it keeps you motivated to keep paying off debt, and makes you want to keep going, that makes more sense than the small amount of difference in the interest rates.

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#22 of 30 Old 04-27-2011, 08:15 AM
 
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I do agree with DR on this - even if for long term finances it makes sense to pay off the highest interest first, there is some satisfaction that comes from paying off a card entirely. If it keeps you motivated to keep paying off debt, and makes you want to keep going, that makes more sense than the small amount of difference in the interest rates.
 

 

Correct me if I'm wrong, as I'm not a DR follower, but doesn't he advocate paying off the LOWEST BALANCE first, no matter what the interest rate is?  He goes more for the emotional angle than the practical one, which is what Suze Orman advocates.

 

OP - Unless it's causing you so much undue stress that it's affecting your mental health, I'd still go with what I first suggested, even if it means there will be balances remaining on the cards.  I guess I read your post that those smaller balances were totals owed and not partial totals.  What are the actual balances, then?  Can you still pay them off, leaving just the one large bill?

 

Another thing to be cautious of is why you accumulated so much debt.  Don't let yourself pay these off, then start using them again with teaser rates.  Get to the root of why the balances got so high in the first place.  (Especially as you say that you're not on solid financial ground.) Good luck!
 

 

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#23 of 30 Old 04-27-2011, 08:58 AM - Thread Starter
 
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Velochic, I think the poster before you worded her post a little confusingly, but when I reread it I understood what she meant, and it is line with DR methodology.

 

Yes, I'm going to pay off highest interest rates first.  The remaining balances will be paid off by Oct (except for the huge one, obviously) and we are not using the ccs anymore, although I almost got tempted by a groupon this morning (!). No more spending til this thing is under control.  That's another reason I feel so strongly about paying them off and not settling or defaulting. This is pain that I will not forgot or go back to! And it's not a situation we will ever be in again...dh had been self employed for several years, always waiting for his next project or next break and the ccs bridged the gap for years. We know better now, thankfully, although it was a hard lesson.  And dh is now working for a company as an employee, which means steady paychecks and steady progress...

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#24 of 30 Old 04-27-2011, 09:55 AM
 
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The math isn't quite accurate....once the numbers I posted are paid off, there will still be balances left on the first two cards, just at negligible interest rates.  So the minimums might go from $160 to $60...something like that. I did some rough math and that's about where it lands.  I'm going to call Discover tomorrow just to make sure my math is in the ballpark.


And this was my question:  how much are the TOTALs on those first three cards.  Because that's going to make a huge difference.  If you're not fully removing the minimum payments like velochic's post assumed, then nobody can really help figure out the best option because we can't calculate your monthly min payments.

 


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#25 of 30 Old 04-28-2011, 08:36 PM
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If you pay down the $40k by $10k (the amount you have to work with), you save $235/month in minimum payments.

 

If you pay all of the 3 smaller ones off plus use the remaining $5k to pay down the large one, you save $435/month in minimum payments.  You will have the one large payment, but instead of paying $1160/month total, you will be paying $725.  So, in the end it turns out that not only will paying off the highest interest cards save you money in the long run, but it will make your monthly payments lower, too.  At least that's how it works out with the numbers you gave.

 

Oh, and please, please, please don't trade unsecured debt for secured debt by paying credit cards with a home equity loan.  That is like... a cardinal sin, financially.  Especially if you are on financial rocky ground.

 


I completely agree with all of this.

 


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#26 of 30 Old 04-28-2011, 09:25 PM
 
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We had a similar goal, cut back monthly minimums. What no one has mentioned are the obsurd late fees and overlimit fees you will see if you end up with a handful of cards that can't get paid each month.

What we did, paid off the looming promo balances first, then using the income I was confident we would get each month, I wrote down a plan for how much to pay to each card, taking in consideration interest rates and later promo dates. Setting our focus to several cards at once. What I did was take the promo amount and decided it by how many weeks letf before it expires (minus a few for wiggle room, were paid weekly) put that amount in the plan, the rest of the income was set to pay the next highest apr. We paid off 6 cards in 3 months. Now, we are confident we can handle our minimums so we are paying the highest interest rates. If we were to get a lump sum though, we would pay off multiple smaller balance cards first though.

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#27 of 30 Old 04-29-2011, 07:50 AM
 
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I agree with paying off the three smaller balances first, then throwing the extra $5,000 at the larger balance and increasing your regular payments to the larger card.
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#28 of 30 Old 04-30-2011, 12:42 PM
 
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Forgive me if this has already been mentioned but did you consider making a settlement on one or more of the cards.  Sometimes the credit card companies will forgive up to half the balance if you pay the other half in one lump-sum. I'm sure this isn't good for your credit and you have to pay income tax on the amount of forgiven debt but with such a large amount of debt, this might be a good option since you have the available chunk of money.  Also, have you considered meeting with a financial advisor.  They might be able to help you, especially if they have the opportunity to invest some money for you.  They often get kick backs from the investments rather than from their clients.

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#29 of 30 Old 04-30-2011, 06:44 PM - Thread Starter
 
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Forgive me if this has already been mentioned but did you consider making a settlement on one or more of the cards.  Sometimes the credit card companies will forgive up to half the balance if you pay the other half in one lump-sum. I'm sure this isn't good for your credit and you have to pay income tax on the amount of forgiven debt but with such a large amount of debt, this might be a good option since you have the available chunk of money.  Also, have you considered meeting with a financial advisor.  They might be able to help you, especially if they have the opportunity to invest some money for you.  They often get kick backs from the investments rather than from their clients.


I've looked into charge-offs and hung out on creditboards.com. I haven't done enough research to know ALL the pros and cons of going that route, but we are current on all of our bills and always have been, and last time I checked our credit score was in good standing (it may have changed considering all the credit line decreases). Our current plan has us debt free in 2 years...I kind of feel like we should just suck it up and pay it off. We are renting a house and hope to buy in the next couple of years...if it takes 2 years to  pay off the CCs, it'll take another two or three years to save up for a downpayment. Thats 5 years. It occurs to me that if we go the route of having the ccs discharged we're looking at the same kind of timeline...

 

Anybody want to chime in on this?

 

(and I think that if you are insolvent, you don't pay tax on discharged debt, but not sure whether we are insolvent)

 

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#30 of 30 Old 05-01-2011, 06:50 AM
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I've looked into charge-offs and hung out on creditboards.com. I haven't done enough research to know ALL the pros and cons of going that route, but we are current on all of our bills and always have been, and last time I checked our credit score was in good standing (it may have changed considering all the credit line decreases). Our current plan has us debt free in 2 years...I kind of feel like we should just suck it up and pay it off. We are renting a house and hope to buy in the next couple of years...if it takes 2 years to  pay off the CCs, it'll take another two or three years to save up for a downpayment. Thats 5 years. It occurs to me that if we go the route of having the ccs discharged we're looking at the same kind of timeline...

 

Anybody want to chime in on this?

 

(and I think that if you are insolvent, you don't pay tax on discharged debt, but not sure whether we are insolvent)

 


Personally, from a moral standpoint, I think you should pay off your debts yourself if at all possible.  It hurts our entire economy when people don't.  (And cc companies won't even think of bargaining with you until you're 180 days delinquent on your account.)

 

I would pay off as many of the smaller balances as you can with the 10k, because I really do believe it gives you a psychological boost.

 


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