Which of these two credit cards should I pay off first?
Card A: $1,200 total credit limit; $953 balance; 14.9% Interest until October, at which point it goes up unless I can renegotiate it lower, which I should be able to do. No bonus features of any type. Has an automated outgoing payment every month of $27.00
Card B: $2,900 total credit; $2,415 balance; 17.99% interest. Purchases get me bonus points, which makes it my “go-to” card for day to day spending right after my debit card. Higher balance makes it more useful for emergencies; however, those emergencies tend to make it harder to pay off entirely.
I have about $300 per month to put on credit card payments. I’ve been divvying it out at $150 each, but it seems like I should work on paying one off completely. I’d still probably drop $50 on the other card, so the one being paid off would get $250/mo.
So - which should it be? Lower interest rate, but quicker to wipe off entirely? Or higher interest rate, but slower payoff? I promise I will abide by The Will of the Dope!
After careful consideration - I would pay off A first. Here’s why, you are closer to paying it off. And, once you pay it off you should always pay off the full balance every month. That way you would be paying 0% interest on that card.
Of course, then you would immediately begin to focus on paying down card B.
Do you have trouble paying off credit cards? There’s a case to be made for card A, even though you’ll pay more interest; paying off a card quickly gives you a real mental boost. In fact, there’s a money guy (Maybe Dave Ramsey?) who advocates paying smallest balances to highest if you find it easy to get off track in paying down balances.
I you want to stretch your limited budget as far as it will go, pay card B first. If you want to feel good about seeing smaller numbers and patting yourself on the back … still pay card B first
Pay off A. Yes, you’ll be paying more because the interest rate on the other card is higher, but it’s not that much. It’s a good feeling to know something is paid off. Then keep up the payments on B. And, even though you get rewards on card B, I wouldn’t charge anything at all until they were both paid off and then only chattels what you can pay in full each month. It’s nice that your balances aren’t that high.
If Card B were something like 8,000 more than Card A, I’d be right up there telling you to pay the smaller one off first so you’ve got a success to remember while you’re slogging through Card B.
However, with the balances so close to each other, it’s really better to clear off the higher-interest one first.
Also, since that’s the one that gives you rewards, it’s good to try to keep it clear as much as possible so that it CAN be used in an emergency, so at least something good comes from having to put loads of money on credit. (Believe me, I know that’s not always possible to keep it paid down monthly, but it’s nice to try.)
Put the other card in a drawer so you don’t put any more on it in the meantime, and then it can get paid down in little smidgens, while you’re concentrating on keeping Card B paid off, and then while you’re paying Card B in total from month to month.
Honest to god, this sort of detail is just not that important: it’s like going around fretting about the impact of LCD displays on your utility bills when the windows are open and the AC is running. Yes, it makes a difference, but nothing like the difference just carrying the debt in general makes.
The most important thing is to stop adding new debt, and I notice you mention that card B “is” your “go-to” card. Until you change that to “was”, all that “paying off” really is is making more room for putting on.
I had this exact problem for years and never got ahead of my debt in any meaningful way.
Is it possible to pay off card A, which you can do in just 3 months, then transfer the max balance from card B to to card A which has the lower interest rate and just continue paying off card A, or is that insane?
Having 2 cards isn’t that big of a deal. It’s not like she’s juggling 8 or more cards and is having trouble keeping track of all of them. Plus, if one of her cards ever gets compromised (fraudulent charges or just plain stolen), it’s nice to have another one as a back-up.
Voted for B. It’ll take longer to get rid of both of the debt, but you’re saving more money in the long run.
I have two because they’re from different banks: one is my “personal” CC and account, the other one my “business” CC and account (I’m self employed). I don’t use the credit on them, though: both are set to “pay in full”.
If my calculations are right, clearing B first saves you more: that’s the one I’d attack first - but of course and as has been said, the most important thing is to keep them as “something to be used only in case of huge emergency” and not as a revolving door which charges a toll every time a store’s till dings.
No, Icarus’s suggestion actually might make sense. The way my two credit cards work (and I assume Maggie’s cards as well) is that I have a grace period, where interest is not applied to new purchases, only if I don’t carry forward a balance from the previous month. Since I pay off the card every month, that means any new purchases are interest-free.
However, if I didn’t pay off the balance every month, any new purchases begin accruing interest the minute they’re made. (I accidentally proved this to myself one month.)
If Maggie is using either credit card for day-to-day purchases (she implies she’s using Card B for such) and her card works the same as mine, she’d probably be better off paying one card down to zero, then using only that one for her day-to-day purchases, but keeping it paid off. Whether this strategy is actually better or not will depend on the amount of her day-to-day purchases she charges to the card every month, and if she’s certain her finances will allow her to keep the card paid off every single month.
What’s your credit score? How much is the annual fee on the reward cards?
Reward cards are great if you are religious about paying them off every month. I have 5 of them, and I’ve gotten far more back out of them than I’ve paid in annual fees. But I don’t pay them off every month. If you are paying interest and annual fees, you are probably screwing yourself because your return is probably not as great as what you are paying out for them, especially with the higher interest.
If you have a solid credit score, I’d find a card with the lowest interest rate (some offer intro rates of 0%, but then kick in to a higher rate, so be careful.) and transfer all of the balances to that card. I’d pay that one off as quickly as I could. Then I’d cancel Card A (unless it’s the lowest interest rate you can get) altogether. What new purchases I put on Card B, I’d pay off every month.
Remember, you don’t earn Rewards on interest, but only new purchases.
Put your effort on the smallest balance first, and maintain payments on the rest.
When A is 0 combine that payment amount with B’s, and pay B off at an accelerated rate. Assuming you have C and D with even larger balances, continue in order of increasing balance, and use combined payments to knock them off in turn.
Yes, I will acknowledge interest exists, but by the time you are making payments on a card that are the summation of the payments of the previous cards, you are paying them down at a rate that the interest accumulation approaches triviality.
Okay, I found this part very disturbing. You’re using a higher interest-rate card for “day to day spending right after [your] debit card” and you are perilously close to your limit, which seriously impedes its use for any real “emergency” spending. Stop it. Stop using credit for “day to day spending.”
Use your debit card for “day to day spending” and when you run out of money, stop spending. Your problem isn’t paying off the cards but stopping the spending. Good luck. You can do it.
I recall reading that paying off smaller balances first helps people stay motivated and makes the debt seem more managable, as the number of monthly bills come in decrease, so I voted A. But once you pay off A, you need to stop using it and start chipping away at B until it is zeroed out.
