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$1000 at 1.99% APR = $19.90 per year in interest

$1000 at 5.05% APR = $50.50 per year in interest

You can see that in this scenario, you're actually making $30.60 per year.




Of course, you're overlooking the fact that interest has to be paid on that 5.05% earnings. Realistically, figure 25% will be paid to the tax man. By my calcuation, that leaves the OP earning less than $18 a year.

I recently had a similar situation. ~$4k sitting at a 2.99% fixed for life, and another $3k sitting at 1.99% fixed for life. I had more than enough money sitting in ING to pay both, earning somewhere between 4 and 5%. But how much was it really earning me? Assuming the rate was 4.4% (makes for easy math), and a 25% tax rate, my effective net interest rate was just 3.3%. That means my true earnings by keeping that money in savings was .31% on $4k ($12.40/year), and 1.31% on $3k ($39.3/year). That's roughly $52 a year. Yep, just $1 a week for carrying $7k in debt whose rate would skyrocket if I ever missed a payment. A late fee and one month's interest would wipe out any potential benefit for the entire year. I saw the light and paid both cards off a few weeks ago.

For the OP, I would make payoff these a priority, but don't rob your efund just yet. Wait until you've built up enough cushion that taking money out won't leave you in a dangerous position.

Jeff
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