I am in a situation with multiple credit card debts and want to pay it faster. I am a very conscious spender but I have accumulated some debt. On one card, I have almost $6873 debt and on another card, I have $4600, on another card I have $1580 debt, and in another one, I have $1925. Now the $6873 has 0% APR till January 2021 but I am getting a high interest of approximately $86 a month for my $4600 card due to the unpaid balance and the 0% APR was over in May of this year 2020. I am also getting monthly interest in my $1580 and $1925 card. I have savings of approximately $2500 in my different bank accounts. I have a job where I earn approximately $2500 per month. I contribute 1% of my income to my employee's 401k matching fund in Vanguard. These are the only debts I carry and I do not have any other debts at all. I regularly save $300-$400 per month even after all my bill payments and debt payment. Is it wiser to pay the $4600 debt first (paying more than other cards)? I want to pay $600-$650 monthly for this card and want to get rid of it and pay the minimum payment in others. Is my decision correct? Also, is my financial strategy correct overall? Any advice will be really appreciated and I am hoping to get rid of all of these credit card debts in 1-1.5 years and I believe I can do it. Thanks in advance.
I was in almost the exact same scenario 22 years ago. I was 23 y/o and able to live with my parents for one year to get the debts mostly paid off. I should have lived with them for 1.5 years and paid them off completely. I also worked all day Sunday at a grocery store bagging groceries. Saturday was my only day off. The money from the grocery store wasn't much, but it helped put a dent in the debt and reduced my spending on the weekend.
- The most important thing is you're making a plan, more important than which debt you pay first.
- You're right to pay the $4600 debt first b/c it's at 22.4% and to pay minimum on cards with 0% teaser offers.
- You need a PT job and/or training for a job that pays more.
- It's less important, but try to get a bank to lend you the money at a low rate. Don't waste much time with this because it won't matter if you pay off the debts faster. (I got really upset when a bank denied me a loan, and in retrospect the loan wouldn't have helped as much as picking up more PT hours.)
You need a PT job or a better FT job b/c if your average interest rate is 12% and you want to pay off the full $15,000 you owe in 24 months, you need to pay $705. If you can pay $1000/mo, it goes down to 16 months. Ideally, you'd get it down to under a year by working your tail off. I remember thinking it felt like an ETERNITY working all the time. I was angry if I had any annoyances on Saturday b/c that was my only day off. But in all the PT work I actually had more interesting experiences and met more people than I did at the bars. If I could do it again, I'd try to work more... maybe searching harder for a higher-paying PT job and trying to have a more easy-going attitude that I'll either find a better job and pay this debt off faster or have interesting stories if it takes two years.
In the long run, you will pay less interest overall if you pay off the highest APR debt first. However, some people find that paying off the smallest debt first (so you can declare victory and close the account) is psychologically helpful to staying on track.
1. Stop saving so much. Apply those funds to your $4600 credit card. It's nice to have a little nest egg but if something comes up, you can use a credit card. Your savings may pay 1-2%. You are paying about 22% on the $4600. If you put $350 a month extra towards the $4600 cc bill, it will be paid in a little over a year...but don't pay it off. (I'll explain in item 4). Consider the credit card as your emergency savings account. After a year, you will start having around $1,000 a year in added income by the way of not paying that interest of $86 a month.
2. Once that $4600 card is paid off, continue to pay the same amount to one of the lower balanced cards. In another 4-6 months you will have another card paid off.
3. Now start paying more than the minimum on the $6873 & the other low balanced card.
4. Keep your credit score in mind. With a lower score, you are more apt to get better loan offers. To improve your score, you don't need to pay things off....just get the balance below 10% on each card. You also want to build "credit history" by having a high "average age" of standing credit. If you pay off a card and cancel the card, you reduce the average age of your credit. You do NOT want to do this. The credit agencies want to see that you can manage your credit, not just pay it off and have none. Also, once you get things down to zero, make it "almost 0". Figure out when your statement cutoff date is and pay off everything except $25-$100 by that date. Let the credit companies see that you are using your credit but that you have it under control. Let the balance every month be 1-3% of your available balance.
5. Join Credit Karma. It's free. You can check your credit every week and they tell you what has change to your account weekly. I was credit score challenged for years. I joined Credit Karma a couple of years ago. I'm looking at their app now. On November 14, 2019, my credit score was 657. Today it is 820!
6. Check your spending. When you go to buy something, ask yourself if you "really need it" RIGHT now or can it wait? If you decide not to buy something for let's say, $25, but felt you could have afforded it, put that $25 into your credit card statement as a special payment. If you are about to buy something online, get the order ready to go and then wait until the next day to actually place the order. Chances are that the next day you will realize you don't really "need" what you "wanted". Don't look at sales fliers. They are trying to get you to buy stuff you don't need.
Hope this helps!
If you are fortunate enough to own a home, a Home Equity Line of Credit would help a lot on your interest expenses which will translate into a quicker payoff of debt. A Home Equity line of Credit is different than a Home Equity Loan. Check out the interest rates in your area. The Home Equity Line of Credit at ThirdFederal Savings & Loan in my area is currently 2.25%. The cost for the loan was only for the Doc stamps to record the documents. Banks differ on this. Shop around. That amount varies with the size of the credit amount you get approved for. This is the advice I gave my daughter and it is working out great for them. They were in a similar situation. Pay off your credit card debt using the line of credit and stop using all of the credit cards except for the one with the lowest interest rate. Set that one up with autopay of the statement balance and be sure you always have enough in your account to cover it. Otherwise, draw on the Line of Credit to cover the one card you use to make the payment before due. Try to make it your goal to eliminate paying interest on your credit cards.
For anyone that may be reading this, don't get sucked into these offers to transfer debt from one card to another and only pay 0% interest. It seems every offer I have received had an up front transaction fee of 3% or more. That just puts you further in debt. Read the fine print carefully before accepting such an offer. If you do transfer funds under one of these offers, try to pay the card that is offering 0% on transfers off before making the transfer(s) to that card. There are usually stipulations as to where your payment is applied, like either towards purchases or special offers first. Then, do not use that card for anything else until it is paid off in the period specified in the offer. In most cases, 1 year. May be less. However, Keep in mind, that transferring the debt to a Line of Credit with even a higher interest rate than the 3% paid up front to receive the 0% rate could result in a lower total payout of interest on the debt because the dollar amount of interest owed reduces each month. This is especially apparent when you pay above the minimum due.
In this case, You owe approximately $13,000. Transfer that to a 0% credit card offer with a 3% transaction fee. That is an additional $391.59. That equals $13,391.59 paid out over the corse of one year would be $1115.97 per month approximately. Interest cost on a Home Equity line of Credit on $13,000 with putting up the same $1115.97 per month payment is only $209.73 at 3%, the interest expense is $281.38 at 4%, and you are still saving money at 5% because the interest cost is $353.91. I figured it out that in this case, the 3% transfer fee is really costing you 5.5% if transferred to the other credit card and paid off in one year. Costs are way more if not paid off.
Do not get a Home Equity Loan. Go for the Home Equity Line of Credit. They are very flexible and you do not have to carry any debt. It is there to act as buffer to get you out of debt and maybe for the occasional large purchase, within reason. Hope you find this helpful.
Forgot to mention, $13,000 @ 2.5%, interest is only $27 the first month. At a payment rate of $600 a month, your Line of Credit would be paid off in 23 months with cumulative interest of about $317. With payments of $650 a month, payoff would be in just over 20 months with a cumulative interest amount of about $292.