Best option to pay off credit cards.

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Hello. I am in need of some financial advice on paying off my credit cards and am somewhat ignorant when it comes to interest rates, loans, and the like…which is made apparent by my current credit card situation.Situation is about $10,000 in credit card debt

BofA with $4000 @ 11.24% +prime (my limit is $5000)
Discover with $4000 @ 18.24% +prime (my limit is $5000)
Chase with $2000 @ 18.49% +prime (my limit is $4000)

Yes, I’ve made some poor financial decisions…lesson learned the hard way. I did have these maxed out, so I have been making progress. I am now in a situation where I do not have to depend on credit cards and can afford to pay about $500 a month and am looking for the best option to use that money? My credit score is 723 TransUnion, 719 Equifax and 727 FICO…so averages in the good range.

My first thought was to take out a peer to peer loan, but apparently these are not an option in the state I live in. I was referred to OneMain Financial, who said their interest rates start at a fixed 27%, but may be lower depending on my credit score. However, they could not give me an estimate without doing a hard credit inquiry, which I declined.I explained to the phone rep that a 27% rate is much higher than my current credit cards that I am trying to consolidate. She explained that was a fixed rate and may be a better option than my current variable rates even if it they are lower. What kind of interest rate should I expect from a company like OneMain with my above mentioned credit score?...and would it end up being a better option than my variable rates I am currently paying?

If simply paying my credit cards at their current interest rates is my best option, should I put the most money towards the highest interest card first while making the minimum payment on the others, or divide the $500 payment between all three of them equally?Other options I have considered would be to call BofA since they offer me the lowest interest, see if they would be willing to increase my credit limit enough to transfer the balances from my higher interest cards. While this would cost a transfer fee, would this ultimately end up being a cheaper option in the long run? Assuming they would increase my limit.

And of course I am considering calling all cards and requesting a lower interest rate. I have been their customer for several years, I have a reliable payment history with them, I have a good credit score and I am in a position with a good credit score where receiving a loan is a viable option…what are the chances they may lower my rates if I mention that to them?

Any other options that would be best to save me money on interest in the long run?

Thanks.

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i was just pointing out how you can still save money on interest even with a higher effective rate, i didn't plug in act... (more)

Tresh (Sep. 23, 2016 @ 1:16p) |

I don't have experience with personal loans (I'd imagine few of us do), but wouldn't it be unusual if the interest was n... (more)

doveroftke (Sep. 23, 2016 @ 1:59p) |

Assuming the Discover loan is simple interest on the average daily balance (daily interest cost goes down every time you... (more)

taxmantoo (Sep. 23, 2016 @ 3:13p) |

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Lets see. Total 10k, 500/month. Lets assume both those are firm. That will take 20 months to pay off.

The obvious answer is to pay off the highest-interest rate first; pay the minimums on the other two.

There are those who say paying off the smallest first, because you pay it off faster, will give you a psychological boost to continue to pay off the other two. Sort of like losing your first 5 pounds on a diet. Some people will get psyched-up after paying off the first bill, and will find some more money to pay on the last two.

The weighted average of your interest rates is 15.49. 15.49% interest on 10,000 for 20 months is $2600. in interest. I know the math is bad, but I was looking for a rough figure.

Is there a credit union you can get an unsecured loan from? I'd suggest either that, or a zero-percent credit card transfer offer. I've not seen one of those lately, but they must be around.

A quick google search "zero percent transfer" turned up several sites, including https://www.nerdwallet.com/blog/top-credit-cards/nerdwallets-bes... . That site cites
"$0* annual fee. Intro APR of 0% for 21 months on purchases and balance transfers, and then the ongoing APR of 13.24% - 23.24% Variable. - See more at: https://www.nerdwallet.com/blog/top-credit-cards/nerdwallets-bes... I don't know if they'd give you enough credit to put all 3 cards on...but if you put the 4k/18% on it, payed off the 2k/18% in 5 months, and left the 4k/11% alone, you'd still be ahead.

micha8s said:   The weighted average of your interest rates is 15.49. 15.49% interest on 10,000 for 20 months is $2600. in interest. I know the math is bad, but I was looking for a rough figure.
 

The rates OP quoted were " plus prime". So the weighted average is also "plus prime"; i.e., 3.5% to the above rate. 

OP: The highest rate you have is 18.5 plus prime = 22% Prime rate would have to increase from 3.5% (currently) to 8.5% before the 27% percent fixed rate might start becoming competitive. In short, the OneMain Financial rep. was not doing you any favors.

micha8s said:   The obvious answer is to pay off the highest-interest rate first; pay the minimums on the other two.

There are those who say paying off the smallest first, because you pay it off faster, will give you a psychological boost to continue to pay off the other two. Sort of like losing your first 5 pounds on a diet. Some people will get psyched-up after paying off the first bill, and will find some more money to pay on the last two.
 

For OP, the highest rate balance is also the lowest dollar amount. He can have it both ways.

1. Pay most on the $2000 chase and minimums on others. should be able to payoff that in 4-5 months.
2. Apply for Chase Slate card. O% for 15 months and zero BT fee. After approved, ask to consolidate the credit line from existing Chase card onto Slate and do the BT from BOA and Discover.
3. Should be able to payoff the 8000 BT in about 16 months.
4. If not approved for Slate or not enough credit line, then join a credit union. Mine offers a personal loan for debt consolidation at about 10% and a credit card at 7.99% with no BT fee.

As you mentioned, the first step is to ask to see if they can reduce your interest rates. Do this today; there is no harm in trying. In 3-4 months, call again, and see if they can reduce further. Repeat.
Each month, pay at least the minimum of everything, and all remaining towards the current highest rate.
Find anywhere you could eek out a little bit more savings. Eat out a little less, drop cable, etc. Given your current interest rates, look at how the payoff times drop with just a little more saving (rough #s):
$500/month = 24 months
$600/month = 19 months
$700/month = 16 months
$800/month = 14 months

Heck, even finding $50/month more in savings shaves 3 months off the payoff time.

borrow from family members who would like to get, oh, 10% interest (split the difference)?

borrow from your 401k? (not a great idea in general, but you are paying 22% freakin' interest..ugh).

make sure your income tax withholding is the minimum amount required, since you are earning 0% on any extra as a loan to the gov't.

as has been suggested, a good plan is to pay minimums on everything except the highest rate (in this case the 2k balance @18.49 + prime). throw everything extra you have available at that one every month until it's gone. then repeat with the next highest rate (discover). then throw everything at the last card.

a 0% fee balance transfer card would save you a good chunk of money over the whole term and would be worth the credit inquiry.

i don't think it has been said, but a very important point is to immediately stop adding to these balances if you haven't already.

Get a second job. Uber, airbnb your place, etc.

Apply for a Chase Slate CC which currently has $0 intro balance transfer fee and 0% APR for 15 months.

1) Cut up the credit cards.

2) Pay the highest rate first as others have said.

3) When all cards are paid off, use ONE rewards card IF you can pay it in full each month.

4) Do NOT start playing FW games with credit cards, your past lack of restraint tells you that you are not a candidate for this.

Motivator said:   Apply for a Chase Slate CC which currently has $0 intro balance transfer fee and 0% APR for 15 months.
  
This could work for transfering the balance from BOA and Discover but I am fairly certain that you can not transfer balances from one Chase account to another.

Depending on your income and based on your current limits you might also have a hard time getting approved for enough to transfer over the full amount to a new Chase Slate card. I would probably pay off the Chase card as aggressively as possible. After it is paid off go in and apply for the Slate card and transfer as much of your remaining balances to the Slate as you can. You might get a slightly higher limit with a lower card utilization and with the Chase card paid off. Probably will not be the full amount needed but will get you close.

I second the people who say cut up the cards. If you can get the entire balance transferred over to 0% then I would build a $1000 emergency fund before starting to pay off the 0% interest. I keeps you from charging when "Emergencies" come up. 

Assuming OP sticks to paying down CC debt and not running any more no matter what, there are multiple way to reduce how much you pay in interest but a lot of them depend on circumstances

1) if you own a home, home equity line of credit should be much lower than any of those credit card interest rates. Get a $10k line, use the money to pay down all credit cards, then put the $500 monthly towards Home equity loan. Alternative could be a low-cost cash out refinance if your mortgage is not at a very good rate anyway. That'd kill two birds with one stone since mortgage rates are pretty low currently.

2) if you have retirement account through work, you could borrow from it to pay down debt. It's not without a ton of caveats however so if you're financial awareness and/or discipline are not great, avoid this method.

3) Balance transfers. Best ones have 0% APR for a year with no fees. Some may have 3-5% fees but for longer durations. The gotcha with those is you cannot let the APR reset to a high rate past the initial 12-18 month period specified in the offer. But if you know you can pay off the balance (say the 2 highest APR credit cards within a year), you'll save a lot on interest.

4) Change tax withholding at work (via W4 form) to give you more take home pay now and apply the extra money to pay off debt faster. It may be tricky to do this late in the year. But definitely do this if you expect a big refund for this tax year. You can underestimate tax owed by up to $1000 tax underpayment without owing the IRS a penalty. Do not do this however if you have trouble estimating tax obligations or if you're not very comfortable with adjusting federal/state withholding multiple times (payroll will love you if you come change stuff every pay period. NOT lol)

5) Short of any of those strategies (or if you're afraid to mess up with those tricks), just pay off the highest APR cards first (Chase first, then Discover, then BoA) and apply minimum payment to the others. Whatever you do, stick to the plan.

OP may also want to increase credit limits a bit so that utilization ratio does not look as bad as it currently does. That'll improve OP's credit score and thus make it easier to get better BT offers. But that also assumes OP truly learned his lesson about handling of credit lines. If you don't trust yourself with higher credit limits, don't do it and just cut up credit cards while paying them down.

Since you have multiple credit cards with lower credit limits, getting another one with enough credit and 0% balance transfer to pay off all three is not an option. Three things I would consider: 1. See if you can borrow money from a friend or relative even if you paid them 10% interest, it will save you a lot of money. 2. If you own a home and have equity, take a home equity loan. 3. Sell your cars/trucks or other valuables (sure you are going to take a hit on selling especially vehicle(s)).

Try Dave Ramsey's Financial Peace University or at least buy the Total Money Makeover book. He gives some good Bible based teachings how to be debt free. Of course, I am a Christian so I am going to recommend paying tithe also to a good Bible teaching church!!!

Thanks for all of the feedback.

My solution...I contacted Discover Personal Loans and got approved for a 10.99% fixed rate loan for 36 months. My minimum monthly payment is $327 for 36 months, so I'll end up paying about $1772 in interest.

Their terms say that there is no penalty for paying it early. If I would pay $500 a month on this, would I still have to pay the the amount of interest based on the 36 month term or would I end up paying only about $1,098 in interest (if I am calculating that correctly)? I'm a little ignorant on the amortization lingo in the terms of agreement, my understanding is I would save interest if I paid it off early. Is this how fixed rate loans usually work? I would also plan on applying extra money from tax refunds, eBay income, etc.

For those who suggested a 0% credit card....that's how I fell into the trap of having three credit cards to begin with. While I like to think I am more responsible now...and I suppose I could cut the card up after I transfer the balances to never be used...I just do not want the temptation of another credit card account. I'm debating on canceling the ones I have after I apply my loan payment to them, but I know that usually negatively impacts your credit score. When I started this spending habit, I was going through some rough circumstances. Spending became my escape. Thankfully I am no longer in those circumstances, so I have things under control. Still, the less temptation, the better.

matrix5k said:   Get a second job. Uber, airbnb your place, etc.
2nd vote for getting a second job.  I work a part time on the weekends in addition to my full time job during the week and have almost paid off over 13k in CC debts.  Not only will you be making some extra money but you will have less free time to be buying things and making poor financial decisions like you have in the past.   

You should have no tax refund if you properly manage your payroll deductions. There should be no "found money".

"eBay sales" implies you are buying things to then sell for profit, i.e. "Fatwalleting". You should stop the buying part immediately, and only sell what you already have.

You should read the Discover terms carefully. 10.99% is a lousy rate, you may want to look around more. You can easily find an amortization calculator online. $327.34 is NOT your "minimum monthly payment". That is the montly payment to end the period paying back the $10,000 principal plus interest. You will end up paying $1,784 in interest. If you pay $500 a month instead of $327.34, and they apply the $172.66 to the principal, you will pay the loan off in 23 months, and pay $1,096 in interest, a savings of $688.

FYI, by paying it off early, since the first payment has more interest than the last payment, in effect you would be getting a 14%+ loan.

Given that I have tried Prosper, Sofi, Upstart, Lending Tree, Lending Club, all of which instantly denied me simply because of the state I live in...also One Main, which offered me 27%, Discover seems like my best option. Please suggest other companies that you think will compete with 10.99% if that is lousy. I live in a very rural area that has no credit unions and only two banks. I may consider trying the local banks, but from other people I've talked too, Discover is reasonably competitive with local bank rates and it doesn't require me sharing my financial details or circumstances with a neighbor...because in a rural community such as mine, everybody is your neighbor. 

Discover asked a lot of questions about my purpose for the loan, including what my current interest rates are on the debt I am consolidating. I’m not going to lie on a loan application, so obviously they are going to give me the highest rate they can get away with while still giving me a better deal than what I am paying now. Any lender would, that’s business. They probably also know that peer to peer lending is not allowed in my state, so my options are very limited. Again, if you can suggest a company that can beat 10.99% AND is eligible to offer me a loan in my state (West Virginia), I'm listening.

EradicateSpam said:   You should have no tax refund if you properly manage your payroll deductions. There should be no "found money".

"eBay sales" implies you are buying things to then sell for profit, i.e. "Fatwalleting". You should stop the buying part immediately, and only sell what you already have.

You should read the Discover terms carefully. 10.99% is a lousy rate, you may want to look around more. You can easily find an amortization calculator online. $327.34 is NOT your "minimum monthly payment". That is the montly payment to end the period paying back the $10,000 principal plus interest. You will end up paying $1,784 in interest. If you pay $500 a month instead of $327.34, and they apply the $172.66 to the principal, you will pay the loan off in 23 months, and pay $1,096 in interest, a savings of $688.

FYI, by paying it off early, since the first payment has more interest than the last payment, in effect you would be getting a 14%+ loan.
 

I am having trouble following the last statement about the interest rate of the loan increasing since that doesn't seem to jive with your statement that OP would be saving money on interest by paying early.  If he saves money on interest, it means the interest charged is calculated monthly on the remaining balance which means it will always be 10.99% for the life of the loan (which is shorten by making the extra payments).  If the rate increased, then that means the interest cost is fixed over the life of the loan and he shouldn't save any money by paying it off early.   Am I missing something that would cause the interest amount to drop, but the rate to increase? 

the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance. if the actual balance is lower than in the original calculation (because you paid extra), then the effective rate is higher than it was originally, unless it is automatically recalculated each month based on the remaining balance. the interest savings is that when the principal is paid off, the loan is done and you owe no more interest, so you save at the back end because your payments stop, not because you paid less each month in interest, again, assuming the interest is not recalculated each month based on remaining principal. so you can have a higher effective rate but actually pay less interest over the life of the loan.

Tresh said:   the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance.
 


Are you making an assumption about how Discover calculates interest or do you have any particular knowledge? I looked but was unable to find the Discover personal loan agreement online.
 

Tresh said:   the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance. if the actual balance is lower than in the original calculation (because you paid extra), then the effective rate is higher than it was originally, unless it is automatically recalculated each month based on the remaining balance. the interest savings is that when the principal is paid off, the loan is done and you owe no more interest, so you save at the back end because your payments stop, not because you paid less each month in interest, again, assuming the interest is not recalculated each month based on remaining principal. so you can have a higher effective rate but actually pay less interest over the life of the loan.
 

That makes sense, but even in that case, your saving will not be a great as mentioned in the previous post. If the interest was not recalculated then the interest paid through the 23 month by OP would $1,523.47 or a savings of just $260.76.  That amount of interest would produce the rate of 14.5% or so. 

doveroftke said:   
Tresh said:   the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance.

Are you making an assumption about how Discover calculates interest or do you have any particular knowledge? I looked but was unable to find the Discover personal loan agreement online.

  i was just commenting on how a higher rate could still yield an interest savings. i do not have a discover card, nor do i have any particular knowledge of their loan or other policies.

hairybeast said:   
Tresh said:   the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance. if the actual balance is lower than in the original calculation (because you paid extra), then the effective rate is higher than it was originally, unless it is automatically recalculated each month based on the remaining balance. the interest savings is that when the principal is paid off, the loan is done and you owe no more interest, so you save at the back end because your payments stop, not because you paid less each month in interest, again, assuming the interest is not recalculated each month based on remaining principal. so you can have a higher effective rate but actually pay less interest over the life of the loan.
That makes sense, but even in that case, your saving will not be a great as mentioned in the previous post. If the interest was not recalculated then the interest paid through the 23 month by OP would $1,523.47 or a savings of just $260.76.  That amount of interest would produce the rate of 14.5% or so. 

  i was just pointing out how you can still save money on interest even with a higher effective rate, i didn't plug in actual numbers.

Tresh said:   
doveroftke said:   
Tresh said:   the interest is calculated based on the expected balances if you made the expected payments. so the interest in month 6 (for example) is based on the expected remaining principal balance in month 6, not the actual balance.

Are you making an assumption about how Discover calculates interest or do you have any particular knowledge? I looked but was unable to find the Discover personal loan agreement online.

  i was just commenting on how a higher rate could still yield an interest savings. i do not have a discover card, nor do i have any particular knowledge of their loan or other policies.

  
I don't have experience with personal loans (I'd imagine few of us do), but wouldn't it be unusual if the interest was not calculated each month based on the outstanding balance?
 

Assuming the Discover loan is simple interest on the average daily balance (daily interest cost goes down every time you pay something), it doesn't sound too bad for unsecured money given the OP's apparent credit profile, which indicates a history of living beyond means by borrowing to augment spending.

Don't run up more debt on the credit cards after using the Discover loan to pay them off.
Do make a payment on the Discover loan every time you receive wages.



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