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Financial Question - how best to go about this...Paying down CC Debt.

The Stigenator

The Stigenator

Lifer
So this past year due to several major side tracked events, I ended up with around 13.4K of combined CC debt. (In FY 2010, I had only <4K in debt across all cards)

CC#1 - $63xx
CC#2 - $32xx
CC#3 - $20xx
CC#4 - $19xx

I just looked through some transactions on CC #4, I do not recognize some charges, so I am going to go call them in the morning, since I do not remember buying software.

Anyway here is my dilemma:

If I use all of the liquid cash I only have 9.3K roughly paid.
Anyway if I snowball it, then logic states I hit the biggest card with the 6K first, then the 3K then the 2K and 1.9. This also means one cannot use the cards any more, which I have no problems doing unless I run into these emergency transactions, which is what caused the massive increase in debt. I do not mean emergency transactions meaning buying a pair of $200 diesel jeans, but more like emergency travel.

How best to go about it in the short term. I figure if I pay off the 2 of the big cards teh 6 and the 3 ones, I will be saving about 300/mo which can go towards the other cards, but then I have no major savings going in until I do my taxes early next year. I rather not pay the interest levels I have been paying for such high amount of debt. Then again, the faster I pay it off, the faster I will be able to get back to healthy savings.

Now I am not touching the savings I have for buying my house (downpayment) that is in a completely seperate account that I do not touch. Nor am I touching my 401K, or my Stock Accounts.

Any suggestions?
 
See if you can land a 0% card or two. Transfer some balances and pay off the highest rate cards first.

http://www.mymoneyblog.com/best-pre-screened-no-fee-0-apr-balance-transfer-offers

The Chase Slate card listed has 15 months at 0% with no transfer fee. Citi offers a few cards with 18 months at 0% but with a fee. It still comes out better than paying interest on your current cards.

Keep some cash set aside for emergency purposes, but do use as much as you can to pay down those balances. Between that and moving existing balances to 0% you will save a bunch of money that you are currently throwing away on interest.

To be clear, are you saying you have $9k to pay down your debt of roughly $13.5k?
 
I got a home loan with about that much CC debt, but that was about 6 months before the housing crash hit home. I don't know what the criteria is now.

What I did was get a home equity loan a few months after I closed on the house to wipe out the CC debt. I did put $25000 down; I considered paying off the debt first but I didn't want to touch my downpayment either.
 
The Stigenator said:
So this past year due to several major side tracked events, I ended up with around 13.4K of combined CC debt. (In FY 2010, I had only <4K in debt across all cards)

CC#1 - $63xx
CC#2 - $32xx
CC#3 - $20xx
CC#4 - $19xx

I just looked through some transactions on CC #4, I do not recognize some charges, so I am going to go call them in the morning, since I do not remember buying software.

Anyway here is my dilemma:

If I use all of the liquid cash I only have 9.3K roughly paid.
Anyway if I snowball it, then logic states I hit the biggest card with the 6K first, then the 3K then the 2K and 1.9. This also means one cannot use the cards any more, which I have no problems doing unless I run into these emergency transactions, which is what caused the massive increase in debt. I do not mean emergency transactions meaning buying a pair of $200 diesel jeans, but more like emergency travel.

How best to go about it in the short term. I figure if I pay off the 2 of the big cards teh 6 and the 3 ones, I will be saving about 300/mo which can go towards the other cards, but then I have no major savings going in until I do my taxes early next year. I rather not pay the interest levels I have been paying for such high amount of debt. Then again, the faster I pay it off, the faster I will be able to get back to healthy savings.

Now I am not touching the savings I have for buying my house (downpayment) that is in a completely seperate account that I do not touch. Nor am I touching my 401K, or my Stock Accounts.

Any suggestions?
Click to expand...

I used to be an underwriter for home mortgages and help manage clients finances...

First identify which CC: CC #1, CC #2, CC #3, and CC #4 has the highest interest rates and current highest minimum monthly payment. Pay down or pay off the highest interest rates first. You should keep the two cards you have the longest relationship with open and if plan to close two cards, close the 2 that you have the shortest relationship with. You should do it soon and no later than 6 to 8 months when you are shopping for loans for your new home.

Second figure paying off or paying down balances to lower your overall monthly payments of all 4 cards. You don't have to do it all at once - but pay more than the minimum monthly payment = this will also help increase your credit score.

If you you have more than 4 CCs to begin with - If you plan to cancel two of your cards, DO NOT cancel the two cards you paid off less than 3 months before you run your first credit score to get approved for a home loan... canceling cards will temporarily lower you credit score... if you cancel the two cards about 6 months before your first home loan approval - continuing to pay down the balance of the other two cards will bring back up your credit scores.

Third... keep a balance on at least two of the four cards (at least a less than 50% of the open credit line of the two cards) - because continuing payment of them will help increase or stablize your credit score (depending on your credit score).

By taking time to pay down your cards you are doing two things: building and maintaining your credit score... allowing you to make adjustments (or sacrifices) on your monthly spending - using that money towards paying down the card...assuming that you are on AnandTech forums = no PC upgrades or new Electronic Toys until AFTER you get your house, so you don't dip into savings and it is better to use your "Cash Hoard" for emergency than a CC for emergencies that you will pay interest on.

My recommendation is pay off or pay down the card with the highest interest rate first and or ones that charge an annual fee. The key thing is to get your monthly payments LOWER, reduce outstanding balances to lower your credit liablity, and to reduce your debt to income ratio (D/R)... D/R is very important at getting you approved for the loan you need to get a house.
 
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The Stigenator said:
So this past year due to several major side tracked events, I ended up with around 13.4K of combined CC debt. (In FY 2010, I had only <4K in debt across all cards)

CC#1 - $63xx
CC#2 - $32xx
CC#3 - $20xx
CC#4 - $19xx

I just looked through some transactions on CC #4, I do not recognize some charges, so I am going to go call them in the morning, since I do not remember buying software.

Anyway here is my dilemma:

If I use all of the liquid cash I only have 9.3K roughly paid.
Anyway if I snowball it, then logic states I hit the biggest card with the 6K first, then the 3K then the 2K and 1.9. This also means one cannot use the cards any more, which I have no problems doing unless I run into these emergency transactions, which is what caused the massive increase in debt. I do not mean emergency transactions meaning buying a pair of $200 diesel jeans, but more like emergency travel.

How best to go about it in the short term. I figure if I pay off the 2 of the big cards teh 6 and the 3 ones, I will be saving about 300/mo which can go towards the other cards, but then I have no major savings going in until I do my taxes early next year. I rather not pay the interest levels I have been paying for such high amount of debt. Then again, the faster I pay it off, the faster I will be able to get back to healthy savings.

Now I am not touching the savings I have for buying my house (downpayment) that is in a completely seperate account that I do not touch. Nor am I touching my 401K, or my Stock Accounts.

Any suggestions?
Click to expand...
What's your income? What's left over every month after you pay bills?
 
DixyCrat said:
What's your income? What's left over every month after you pay bills?
Click to expand...

I have close to 800-1000 available after my bills are paid. My Net is about 3.3K/mo Gross is 5.xK/mo, I lose a lot on the retirement / 401K / Roth / Taxes etc.

The issue with what is left after paying bills goes towards food, entertainment, gas (currently using about 400/mo in gas alone). My food bill is not bad, about 200-300mo. What is left is around 200-300/mo after moving stuff to savings (I automatically move 150/mo into savings in the beginning of the month).

I could keep a better track of my expenditure and my budgeting, which would help loads. I plan to from June onwards, thats why this whole thread came about. I figured that if I pay down the CC debt, that leaves more cash on hand in the long run.
 
The Stigenator said:
I have close to 800-1000 available after my bills are paid. My Net is about 3.3K/mo Gross is 5.xK/mo, I lose a lot on the retirement / 401K / Roth / Taxes etc.

The issue with what is left after paying bills goes towards food, entertainment, gas (currently using about 400/mo in gas alone). My food bill is not bad, about 200-300mo. What is left is around 200-300/mo after moving stuff to savings (I automatically move 150/mo into savings in the beginning of the month).

I could keep a better track of my expenditure and my budgeting, which would help loads. I plan to from June onwards, thats why this whole thread came about. I figured that if I pay down the CC debt, that leaves more cash on hand in the long run.
Click to expand...

I would pay out your two newest CCs and then bring your overall credit down to 15% utilization by paying down your highest interest card, but keeping it open. Destiny is right about the 50% mark, but dropping it to 15% will maximize your overall credit score.

If you want a house in a year and a half then this should be a reasonable plan.

Do you have a car payment or any revolving debt like a furniture loan?
 
If you're secure in your job I say pay off the lowest three with your savings and hit the $6300 hard each month after that.

If the bottom three are gone you should have a couple hundred extra bucks to pay towards the biggest one.

btw - I think snowball means hit the smallest one first to reduce your monthly debt obligations as fast as possible.
 
I would see if you can get any 0% balance transfer deals and then transfer the balance, you can then pay off the debt at a slower pace without paying interest. If you cannot transfer all of your debt then pay off the ones that still charge interest first.

I have had 5 cc's over the last few years and paid about £100 interest in total on £7000 debt. My current purchases card still has more than 6 months interest free and my balance transfer card is about 12 months.

What I do is save the money over the interest free period so that if no balance transfer deals are available I can pay it off in one go and get another 0% purchases card.

If there are no deals available then the best option is to pay down the one that is costing you the most in interest per month. If you go to www.moneysavingexpert.com there are tips on how to do it as cheaply as possible. It is UK based but the principles are the same.
 
If your credit score is good, try for a new card with a 0% balance transfer offer. If your score is not good, don't apply for anything else right now. You didn't say what the interest rates on the cards are, but check to see if a local credit union has a better rate on a personal loan.

I am a fan of paying on the highest interest rate card first using the snowball method. If you are saying you will be getting a nice tax refund next year, then cut your withholding now and use the extra money to pay down the CCs. I would also cut back on the 401k/Roth contributions temporarily and direct that money towards getting the debt cleaned up as fast as possible. This approach lets you keep your cash stash untouched for an emergency fund.

You are doing the right thing by working out a budget. You will be amazed at how easily you can free up a couple hundred a month just by watching your spending.
 
Personally, I would dip into the savings/stock accounts to pay off the entire debt, and then work at replenishing the savings/stock accounts from the money you would have been spending on credit card payments and interest over the next few months.

I don't know what your interest rates are on the various CC's but they are usually far higher than any interest income you would be making in your savings/stock accounts.
 
Check the interest rates on your savings account and on the cards. The cards will almost certainly be higher.

The first thing you need to do is destroy 2 of the 4 credit cards, so that you cannot put anymore charges on them. Then, try to clear up the other 2 ASAP so that you have a credit buffer available for emergencies.

Unless your savings plan has major penalties for withdrawral or cessation of payment, you should immediately stop paying into the savings account, and withdraw as much as possible to pay the CCs down as fast as possible. Carrying those card balances could be costing $200 per month in interest charges. By contrast, $13k of saving balance would be earning $20 per month (- taxes). This is something I would definitely tap into my downpayment savings for - as it's an easy $180 per month saving, with no change to net worth. The only reason I wouldn't draw it down, was if there were excessive penalties (e.g. it's a long-dated CD). I would even consider draining stock accounts, as long as these were not mutual funds with excessive withdrawal fees.

You should not drain down a retirement or tax deferred savings plan, except in truely exceptional circumstances - the tax benefits are too valuable, to lose by paying off cards 6 months earlier than otherwise. These circumstances are not exceptional enough.

The cards you should pay down first are the ones with the highest interest rates, not the highest balance.
 
The biggest thing would be, why did you get in debt in the first place? And what are you going to do differently now so that once you get out of debt, you stay out of debt.

I would get on a written budget, keep an emergency fund ($1000-$2000), and then just pay it off as quickly as possible, then build a real emergency fund (3+ months of expenses), keep on a budget and stay out of CC debt.

But if you don't change the habits that got you into debt, you will likely just go back into debt again.
 
blinblue said:
The biggest thing would be, why did you get in debt in the first place? And what are you going to do differently now so that once you get out of debt, you stay out of debt.

I would get on a written budget, keep an emergency fund ($1000-$2000), and then just pay it off as quickly as possible, then build a real emergency fund (3+ months of expenses), keep on a budget and stay out of CC debt.

But if you don't change the habits that got you into debt, you will likely just go back into debt again.
Click to expand...

fact.
 
I would keep your $9k if $13k on credit is a huge problem.


Just make the largest payments you can and start at the highest interest.
 
If you feel that you are able to cleanup the mess and stay out of it;

Get a 401K loan from your account and cleanup the mess. Paying yourself back is best.
The interest saved on the cards will allow you to pay back the loan quicker.

Some companies will not allow you to pay into the 401K until the loan is paid off.
To setup the payment schedule if you are blocked from normal 401K payments:
Determine the amount of loan needed to pay off the cards.
Determine the time you would need at your current schedule to pay the cards off.
That provides the monthly payments back into the 401K.

Figure how much more you can paydown because you are not paying into the regular 401K. Adjust the payment payback by that.

Example
You borrow $15K from the 401K
You are making $500/month payments to the CC
That will take 30 months to payoff.
You are paying $300/month into the 401K.

If frozen from 401K payments, that is an additional $9K to be used to payback the loan over that time
So you really end up borrowing 6K to cover a 500/month CC payment
The loan term is then able to be moved from 30 months @$500 to 20 months @$800 month with no change to your living status.

if the 401K is not frozen; then you need to decide how much more your can take out of your living costs to payback the 401K faster.

the above does not even account for you lessening the debt but taking half of the 9K in savings and applying it to the CC debt. That half payment will come back to you inside 1-2 years in interest alone. You will have wiped out 1/3 of the debt; allowing 1/3 of the interest and payments being applied to the rest.
Again roughly cutting the term from 30 months to 20 months.
 
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IMO, paying interest on the CC is probably costing you more than you are earning through any of the other things you mention, so that would be my priority ahead of everything else. But, you dont list your interest rates, so just speculation.
 
Don't forget to call up the card issuer and ask for a cut in APR. Chase was once charging me 14.6% but dropped it to 10% at my request back in '06 or so.
 
If you qualify for a chase slate, it's an excellent card for this scenario...15 month 0% APR on purchases and balance transfers/no annual fee/no balance transfer fee.
 
not to thread hijack but i have a question that doesn't need a new thread. great replies btw and best of luck op.

i have 3k on a credit card. 12% interest then 17% after a few more months. i just opened a chase freedom a few months ago. my credit sore was 720 at the time. i'm curious if i apply for one of the 0% interest cards mentioned in the thread and switch over my debt(i plan on havcing the 3k paid off by end of the year) will it hurt my credit?

CCs i have:

amazon chase: no balance
chase freedom: no balance
best buy: no balance
capital one: $3k
billmelater account: no balance
 
Do you have a credit line or could you qualify for one? I would pay all 4 off with the credit line, at least the debt is in one spot now, and at a lower interest rate. You're looking at maybe 5% vs 15%. Big difference. Then use all the savings you have to pay down as much of it as possible. You are paying more interest on debt than you are on savings. Otherwise banks would be going bankrupt.

Also as suggested do your best to avoid this situation again. Still keep the cards though, it's better to have credit and not use it than to need it and not have it. Emergencies do happen, especially in the states where you have to pay for medical. You could get sick, hurt, etc... A simple antibiotic medical prescription can cost in the hundreds, if thousands.
 
Destiny said:
You should keep the two cards you have the longest relationship with open and if plan to close two cards, close the 2 that you have the shortest relationship with.
Click to expand...

I have a question about this. I was planning on eventually cancelling one of my cards that I've had for awhile. Normally, I would keep it open, but they eventually instituted a yearly fee. The card has pretty awful rewards (1% cashback), which means I would need to spend a significant amount with the card just to break even with the fee. My Chase Freedom card is much better overall.

My thought was to cancel the old card once I have it paid off; however, I've had it for nearly 10 years, and I haven't had my Chase card for even a year yet. Would you consider it worth keeping the old card and suffering through the fee until after I get a mortgage?

Destiny said:
Third... keep a balance on at least two of the four cards (at least a less than 50% of the open credit line of the two cards) - because continuing payment of them will help increase or stablize your credit score (depending on your credit score).
Click to expand...

Isn't there a point in which they considered your revolving account balance too high? I thought it was something around 35%? I know they also slightly penalize you if you do not maintain a balance (10-15%), but isn't it also better to save on the interest than to worry about the few points your credit score will drop?

slightlyhuman said:
not to thread hijack but i have a question that doesn't need a new thread. great replies btw and best of luck op.

i have 3k on a credit card. 12% interest then 17% after a few more months. i just opened a chase freedom a few months ago. my credit sore was 720 at the time. i'm curious if i apply for one of the 0% interest cards mentioned in the thread and switch over my debt(i plan on havcing the 3k paid off by end of the year) will it hurt my credit?

CCs i have:

amazon chase: no balance
chase freedom: no balance
best buy: no balance
capital one: $3k
billmelater account: no balance
Click to expand...

If you're referring to the Slate, I wonder if Chase will refuse you the card simply because you have too many Chase accounts. If I remember correctly, Bill Me Later is also Chase, which means 3/5 of your accounts are with Chase.

Chase wouldn't even give me an Amazon card, because I have a Chase Freedom, Bill Me Later and Newegg (which is also by Chase). That includes the fact that the first one gets paid off every two weeks, BML has no balance and the Newegg one has a small balance. My plan was to just use the Amazon card at Amazon since I use Amazon a lot and it has better rewards (when Amazon isn't the 5% quarterly deal).
 
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