I hope this is not a hijack, I was going to start a new thread, but perhaps the OP will indulge me to ask in this thread.
I have had some hard luck in the last few months, the result is that both of my credit cards (Master Cards… one Capital One and one Canadian Tire Options )are pretty much maxed out. I have been making minimum payments on one, and the other I tend to put more money on it and pay for larger ticket expenses with it. I get points on it that I can redeem for discount on purchases at Canadian Tire, or exchange for gift cards. They have the same interest rates, the Capital One has a higher limit and balance than the Can Tire, but it also has higher penalties and a yearly fee. I have had this card for 7 years, the Canadian Tire a year and a half.
Now that my finances have stabilized again what is the best way to pay them off? I now have an extra 300/month to put toward paying down my credit cards (plus the minimum I was paying). Should I put this “extra” all on one card? Which one? Should I continue to put my regular purchases on the card that gives me the bonus points (Depending on how much spending I am doing, I usually end up with a gift card worth 25 dollars every 2 months or so. I tend to send these as gifts to family who live far away)
This was split off from its original thread as it started a topic that was sufficiently different from the original, and is more of an advice question than a factual question (original thread was in General Questions).
The best way to pay off the credit cards is to stop using them. In your case you should only be using the credit cards in emergencies. Use them only for needs and not wants. You probably don’t need new clothing or shoes unless your house burnt down which would then qualify as a true emergency.
Next pay off the card with the highest costs. If they both have the same interest rate, look at things like points and incentives. In the OPs case, I’d pay off the Capital One card first THEN close that account. Having a higher limit is NOT good for you. Ditto on the higher penalties and annual fees.
Suze Orrman tells people to pay off the smaller debts first, because it’s just easier psychologically to both get the “boost” of getting over that one hurdle, and having fewer to pay down each month.
Personally I would look at which is costing you the most. You could do the math and stuff but…which has the highest interest charge (in dollars) each month? I would pay that one off first for sure.
Or split the $300 proportionately amongst the 3 cards. Look at your last 3 statements, add up all 3 interest charges, figure out what percentage of the whole each one represents, then split up the monthly payments as such. If you paid $50 (12.5% of all interest), $150 (37.5% of all interest) and $200 (50% of all interest) in interest last month then you could pay $37.50 (12.5% of $300) to the first, $112.50 (37.5% of $300) to the second and $150 (50% of $300) to the third.
In general that that been my policy, sometimes i paid it off monthly sometimes over a few months in the case of car repairs etc. Unfortunately, I had no income for almost three months so the cards got hit for … well almost everything. Groceries. Dental emergency. Keeping my health insurance current. Paying utility bills. Now my income has somewhat stabilized, my husband has full-time work, and I have paid off another debt freeing up about 300 to put on my bills. With any luck another bill will be paid off by April and then I will have an extra 400/month to pay down.
But is it generally considered that paying off one card completely makes the most sense? The Capital one is already “not in my wallet”, I took it out last weekend.
I would pay off the smaller of them first to lower your total minimum monthly expenses and have one less monthly payment to forget. Then put the $300 + the minimum you were paying on the higher balance card + the $400 you’re freeing up in April and you’ll take a big bite out of that debt every month until it’s done. Then put the $700+ you were paying every month in a savings account to prepare for the next curveball you’re hit with so you won’t have to rely on credit cards again.
Reward points generally will not negate the interest charges if you don’t pay the card off each month, if you have other ways to pay those bills do so until the card is clear. I would be looking to rid my life of one of the cards and the fees associated which means paying it off and closing it, the Capital One seems the one to prioritise but do split your money to make sure you are paying a chunk more than the interest on the other one as well as trying not to add to the balance.
If your finances have improved so much is there any chance of a lower interest loan from your financial institution to consolidate and pay off both cards? I have no idea about Canada but credit card interest rates are huge compared to the offerings on personal loans at the moment here in Australia.
Are the debt consolidation companies helpful in such situations? Seems to me such a company could help the OP in having some of her debt forgiven and then put on a payment plan to make good progress towards eliminating her debt.
It doesn’t seem as if the debt is high enough to warrant that treatment.
What I’d do in the OP’s case is pick one and pay that one off first, BUT also move up from minimum payments in the other one. Those don’t lower the debt. And then, keep putting the amount you put into paying the CCs in a “hidden piggy”. It’s not available money, it’s emergency money so the next time things go bellyup you can eat without going into debt.
Suze would be giving you a Suze Smackdown for that. Dave Ramsey recommends paying off the smaller debts first, and Suze regularly criticizes him for that advice. Suze’s advice is always to pay off the credit card with the highest interest rate first, and the rest in descending order.
I think you need to choose the method that is most effective for you, but I agree with everyone who says that you should freeze or otherwise put away your credit cards until you are completely out of debt, in control of your finances, and have an emergency fund (Suze recommends 8 months of expenses). The credit cards will be there for a true emergency, but it makes no sense to keep adding to them as you’re trying to pay them down.
Last I knew, which was many years ago, on a credit card with a balance, you began paying interest immediately on any purchases. On one that was paid off each month, you would get an interest-free grace period if you paid it in full at the end of the month.
If you still use a card for monthly purchases, it would make sense to pay one off, then use that one exclusively for current purchases, paying it off each month to avoid the interest on new purchases. After that, pay off the credit cards in order of interest rate, high to low.
As I said, that was my understanding many years ago. Hopefully someone can confirm whether that is still the case.
Pay one of them off completely (either lowest balance or highest interest rate).
Pay the other one off.
Never use them again unless it’s absolutely unavoidable.
Reward points/incentives are a total rip-off. You say you get $25 every 2 months, but how much interest did you pay in those two months?
I’d also suggest talking to your husband about your family finances. Why do you need to use a credit card to pay your everyday expenses? Why do you need two credit cards yourself, how many does he have (and what sort of balances is he carrying)? Maybe you could get one joint CC between you and close out all the individual ones? Personally I find that’s a great disincentive to using one - I know if anything to go on the credit card will have to be discussed with my wife, so there goes any impulse buys on the credit card. Anything I want for myself, I have to pay for with my own money (and vice versa). Things we need together get discussed beforehand. It’s been working pretty well so far.
I don’t necessarily see a problem with continuing to use a card for bonus points, but you definitely have to review how interest is calculated. Usually bonus points only help people who pay off the balance every month because they don’t have interest charges on the new purchases. However, if you have a carried balance, many credit card companies add your new purchases when calculating interest.
If you do continue using a card while paying it down, you have to make sure you pay off each month’s purchases, plus some additional amount. You can’t just base your payments on the minimum or the balance will keep going up.
To help you keep track of your financial progress, I would recommend setting up something in Excel to track the difference in balances and interest between your actual payments and the minimum. It’s easy to lose track of how much you benefit by making your additional payments because all you see is the remaining balance, especially when it might take a few years to get fully caught up. It’s very refreshing at the end of three years to compare the “actual payment” column to the “minimum payment” column.
I usually have two credit cards because they can unilaterally raise their rates for any reason or no reason. I like having the option of suspending use on a card with raised rates or even closing the account and still having a usable card. If you close the account as soon as you get the notice that the rates are going up, saying that you do not accept the change, they have to freeze the account and let you pay off the balance at the old rate.
It sounds to me like the OP didn’t overspend to max out her cards, she had other financial difficulties and used the cards to get through that period. There’s nothing wrong with using credit cards as charge cards, it’s the spending beyond your means that is the problem. Once the cards are paid off, if Mona Lisa Simpson uses them only as much as she can pay off each month, there’s no reason not to use them.
do listen to the above advice!
A credit card is not a sensible way to borrow money. Once you’re ‘credit card debt-free’, only use them when you know you can pay off the full balance immediately.
Save up for luxuries - don’t borrow on credit cards.
I’m sorry to preach, but if you always pay off the full balance immediately, you never need to know what the interest rate is. You’ll never pay any interest.
This also means you only ever need one card.
