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No. of Recommendations: 7
Financial scenario #1 in November:
Pay off all but $8,000 of student loans with none going to credit card. Left with $8,000 at 1.875% and $18,000 at at least 16% (right now I'm maxed and can't transfer balances. May be able to transfer as I snowball card balances.) I can continue to put around $1000/month towards paying off for the next year (through November 2008).

Scenarion #2
Pay off all of credit cards, pay off $17,000 of student loans. Left with no credit card debt, and $26,000 at 1.875%. Still have an extra $1000 a month through the next year to put towards student loans or saving.

Either way, I'm stuck with $26,000 in debt to carry for at least 3-4 years, as I know I won't be eligible to reapply for any additional debt repayment for 3-4 years. I know I can pay off another $9-10,000 over the next year, but after that we won't be able to contribute as much, secondary to anticipated income/work changes of my husband's.

Is being able to get an additional $8,000 in free money in 3-4 years (which is not guaranteed, even if I reapply) worth the extra time and accumulating interest on the credit card balances? Am I throwing future free money away for the satisfaction of paying off the credit cards, or is student loan debt at 1.875% that much better of a kind of debt to carry? We hope to build a home in the next 1-2 years. Will lenders care which kind of debt, or is it all equal, since both will be around the same amount?


I agree with bethdig that if the money came from general 'living above your means', the better 'lesson learning' scenario is to pay down the student loans. The question is, how much will it cost you? So, running a couple of scenarios with the following assumptions, it looks to me like you will be able to have your debt paid off by Aug, 2010 in either case.....

- Assume current CC payment of $1250/month and current SL payment of $200/month, for a total debt payment of $1450/month; total debt payment will continue at this rate through Nov 2008; as of Dec 2008, total debt payment will drop to $450/month
- Assume credit card debt will stay at about 16%
- Additional payment of $35k in Nov 2007 for a total payment that month of $36,450 (you don't get to skip your normal monthly payment just because of the windfall payment.....)
- Assume student loan minimum payment continues at $200/month whether or not the windfall payment is made toward the student loan

- Scenario 1 results - total interest paid ~$5,340; payoff date of Aug 2010.

- Scenario 2 results - total interest paid ~$3250; payoff date of Apr 2010.

So the cost is about $2100 to pay down the SL rather than paying off the CC.

So, it would seem that paying off the CC is a 'no-brainer', but throwing in the possibility of getting an additional $8000 back if you pay everything toward the student loan - the question then becomes, what do you think the chances are that the program you are applying to will give you the additional money back? If they are greater than your potential loss of $2100 divided by your potential gain of $8000 (about 26%), then you are economically better off to pay down the student loans, rather than paying off the credit cards. Throwing in the possibility of getting lower rates on the cards from BTs makes the potential loss decrease even further, so my recommendation would be to pay down the student loans.

As far as how mortgage lenders look at the different types of debt, what is most important to them is the minimum monthly payment. In 1 - 2 years under either scenario, you will still have the student loan minimum monthly payment. Under scenario 1, you would still have a minimum payment for the debt on your credit cards, vs. scenario 2 where you had no balance on your cards, and therefore, no minimum payments due. So, if you were stretching to the max to get the highest balance mortgage you could qualify for, scenario 2 would allow you to qualify for a slightly higher mortgage.

However, if you have to stretch that much for a home mortgage and get the maximum loan that the bank will qualify you for, you are probably getting more house than you can comfortably afford. A better option is to figure out how much you think can comfortably pay each month toward a home, considering your current monthly obligations, and compare that to your current monthly housing costs. (Don't forget to include property taxes, insurance, higher utility costs, maintenance costs, etc.) Then, 'play house' by putting any additional money you would be paying toward the new house over your current housing cost in an untouchable savings account. If you can go for a year without touching that savings account, and still meeting all your other obligations, including your snowball, then you will have proved to yourself that you can comfortably afford that amount for a house, plus you will have a nice amount of savings to use for your down-payment, closing costs or even new furnishings or window coverings for the new home (brand new homes usually don't have window coverings). If you have to reach into the savings account for any reason other than the new home, that's potential credit card debt that you would be building up, and you have estimated your potential 'comfortable' housing payment higher than you should have.

Considering that your husband's job is potentially going to become significantly less lucrative in Dec, 2008, I would suggest that you may want to hold off on building the home until at least a year after that change has occurred, and you have put the 'play house' plan in place for the year after the changes have occurred. Otherwise, you run the risk of qualifying for a mortgage at a higher level than you will be able to afford with the changes to his job.

AJ
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