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Hello Fools,

I'm new over on the Green Light boards and they recommended that I bring my CC debt questions here.

First off, with no excuses, I'm currently deep, DEEP in debt, my fault, no one to blame but myself. The good news is, that I've decided that this thing has reached the high water mark. I no longer use credit cards (my subscription to Green Light was actually my last use), and my current pending charges are $0 for the first time in a long time.

I had two cards that were nearly maxed out.

Card "A" has a 16.83% fixed interest rate (and they will NOT budge on that, I've tried to get a lower % and they just won't do it).

Card "B" has a 5.99% fixed rate on a balance transfer from card "A". This 5.99% is for the life of the balance so long as I do not default. However, card "B" also has a 14% fixed rate on additional purchases made after the BT and my wife used this card over Christmas.

Enter card "C". This one I obtained solely to transfer the balance from card "A" in an attempt to bring it down to something more manageable. Card "C" has 0% interest for 11-months, after which the fixed rate will be 3.99% until January 2011 (barring default on my part that is.) One problem here is that "C" has only given me about 1/4 of the credit needed to fully transfer the balance owed on card "A", but that is something I'll have to work around. (at least a chunk of the debt is out of the 16.83% APR)

Now, once all the dust settles for this latest BT I'm wondering the most effective way to tackle this debt head on. I've gotten some advice over on Green Light to go after the highest interest rate first, which would be card "A".

However, I've also heard that I should possibly pay off the smallest amount first, which would be card "C".

I'm kind of favoring the highest interest rate first, as I believe that would save the most in the long run, but I'm wondering what the Fools could tell the fool to make him more Foolish.

-stray-
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No. of Recommendations: 1
Highest Interest Rate to Lowest is the default answer and usually the most Foolish.

However, smaller balances with lower rates are sometimes selected in order to quickly free up more cash in a cash-flow challenged situation. Smaller balances are also sometimes selected for the motivating factor of having paid a card off when faced with a mountain of debt. Smaller balances may also be selected in hopes that it will prompt a favorable BT offer.

Use the snow-ball calculator found as a link on the right >>> to find out what the best order is and how long it will take to be debt-free.

The more detail you post the better the responses you will get. You can get very good math advice on being debt-free as well as good advice on addressing why you ran up so much debt - least you back-slide or repeat the process again.

Welcome to the Board
SD
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No. of Recommendations: 5
Mathematically, *if your financial position stays fixed*, you will always get the most bang for your buck by paying the minimums on everything with all additional money directed at the highest interest rate.

Note that part which is between the asterixes? That assumption is almost certainly false. The reason is that Bank C values your business, so if you pay down your balance with them very quickly you can expect to get a letter in the mail saying "What, paying off so soon? Would you happen to have any other money out there you would like to transfer to us?"

Here is what the bank is thinking: We spent $120 to get stray to bank with us. $120! Burned to ashes. And stray banked with us, and liked it, and we were just getting started on a beautiful relationship which would earn us thousands of dollars in interest over the years. And then some bastards lured him away, probably with a teaser offer. Well, he still has our card in his wallet, and TWO can play at this teaser offer game! It costs us less than $.50 to make it, the $120 is already sunk, and if he bites we're in the money again! We'll just outbid those suckers and let them console themselves by lending the money to a subprime deadbeat instead.

If Bank C doesn't come to that conclusion on their own, lead them to it. "Hey, Bank C, this is stray. I've been banking with you for the last 4 months and loving it, but I'm in the process of restructuring my finances and trying to figure where my relationship with you fits into that. Bottom line? I need more of a credit line with you. If you can give me $X, I will fill most of it with your balance transfer offer, and we'll grow old together. If you can't, I'm afraid your card might have to join my sock drawer. What do you say?"

(There are only two things to remember when negotiating with a bank or anyone else: #1, phrase any request such that fulfilling it achieves a win for the other party. #2, have an alternative to the negotiation in your back pocket. If you can do these two simple things you will have a life of polite, calm, and stressfree discussions with a wide variety of people who will fall over themselves to give you what you want.)

Oh, and forgive me for belaboring the obvious, but stop using Card B for charging anything.
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Now, once all the dust settles for this latest BT I'm wondering the most effective way to tackle this debt head on. I've gotten some advice over on Green Light to go after the highest interest rate first, which would be card "A".

However, I've also heard that I should possibly pay off the smallest amount first, which would be card "C".

I'm kind of favoring the highest interest rate first, as I believe that would save the most in the long run, but I'm wondering what the Fools could tell the fool to make him more Foolish.


Mathematically, you will pay the least money in interest if you pay off the highest interest rate first, so the order should be A, B, C if your goal is to pay the least out of pocket.

Sometimes, if you have a few small balance cards, and big honking balance(s) on other card(s), it can be more psychologically rewarding to pay off the small balance cards before attempting to tackle the large balance. However, since your 'small balance' is actually a method of paying down your large balance, this probably wouldn't be applicable in your case.

Another reason to pay off lower interest rates first is if you have BTs that will expire and after the expiration, the rate will increase to a rate higher than your current highest rate. However, that's not the case here, either - card B is a BT 'for life' and card C is 0% or a low rate for 3 1/2 years (assuming you follow the rules).

You need to realize that because of your wife's mistake in using card B while you had a BT on it, the rate on that card will increase from around the 7% - 8% blended rate it probably is now (depending on how much is BT and how much is purchases) to 14% as you pay it down.

I know you say that you are no longer using credit cards, but just in case something happens and you absolutely have to use one, try not to use one with a BT on it. Yes, the current 14% rate on Card B for purchases is lower than the 16.89% on card C. However, that is subject to change at the discretion of the creditor, and you could get stuck with a 30% rate on purchases, which could increase your blended rate over the 16.89% on card A.

AJ
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Here is what the bank is thinking: We spent $120 to get stray to bank with us. $120! Burned to ashes. And stray banked with us, and liked it, and we were just getting started on a beautiful relationship which would earn us thousands of dollars in interest over the years. And then some bastards lured him away, probably with a teaser offer. Well, he still has our card in his wallet, and TWO can play at this teaser offer game! It costs us less than $.50 to make it, the $120 is already sunk, and if he bites we're in the money again! We'll just outbid those suckers and let them console themselves by lending the money to a subprime deadbeat instead.

If Bank C doesn't come to that conclusion on their own, lead them to it. "Hey, Bank C, this is stray. I've been banking with you for the last 4 months and loving it, but I'm in the process of restructuring my finances and trying to figure where my relationship with you fits into that. Bottom line? I need more of a credit line with you. If you can give me $X, I will fill most of it with your balance transfer offer, and we'll grow old together. If you can't, I'm afraid your card might have to join my sock drawer. What do you say?"


This might be a good idea, IF strayrider were actually able to pay card C off, or even down substantially in a few months. However, there would have to be a lot more information given about current balances and the snowball amount. Plus, there is the risk that in the time the balances on card C are being paid down, that the opportunity to transfer balances at the 0%/3.99% rate will disappear. After all, many card companies lure you in with a long term low rate BT for the initial transfer, only to offer you transfers that aren't so tantilizing in the future.

It's obviously strayrider's choice, but paying down card C in favor of card A right now, especially during the 0% time frame, will be lost money if the credit limit isn't increased and/or the rate offer is no longer available. Given these two fairly high probability risks, it is likely to cost less in the long run to pay down card A first.

AJ
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stray-

Conventional wisdom, as stated by others, is to pay minimums on B and C, throw everything including the kitchen sink at A.


An alternate strategy I might try is:

1) Pay off Card C ASAP after the transfer.
2) Request a credit line increase on C based on your payoff history (and reduced debt) and see if they will let you transfer the remaining balance of card A.


Drawbacks to this plan are:

If step 1 takes too long or you fall down in your financial plan, you will carry the interest on card A even longer, and you might damage your possibilities for step 2 to occur, if it ever does.


Personally I think you've done a fine job with interest-rate hunting, but now you need to stop thinking about that and focus on being in strict pay-down mode. Start hunting instead for ways to make more money, cut expenses, find things to sell, and whatnot. And of course any windfalls or found money goes straight to your snowball.

Best of luck,

~dswing
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Thank you to everyone who responded to my question.

I am currently in what most people would consider a very scary situation. Dig this, I just added up my total debt which now resides on the three afore mentioned cards: $29,926.28 (owch)

This versus my total emergency fund of $1,837.30

I make around $1,600 a month take, and my wife brings in an additional $1,600, so were just hanging in there by our fingernails.

As I said, most would find this a scary situation, but for some reason I'm not overly concerned. I'm doing the right things. My pending charges are $00.00, I'm paying everyone on time and still managing to save a bit every week.

I'm going to go with the attack the high interest rate debt first. This will be a long battle. I'm confident I'll win in the end. Right now it's kind of "two steps forward, one step back" due to the interest rates, but that'll get better as I pay the balances down. And, hey, it's a lot better than the "one step forward, two steps back" dance I've been doing for the past three years.

I'm hopefully becoming a Fool.

Again, thank you. I'm here to stay. I'll keep you posted from time to time how things are going. I'm just happy that I'm doing something about it.

-stray-

ps -- meanwhile, I've been listening to the Motley Fool radio archives on the NPR site. Those Gardner boys crack me up. :-)
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I do not carry any CC balances. I have never done a balance transfer because I do not have any balances to transfer.


Good for you; I currently have $215K in CC debt and I couldn't be happier!

Different strokes for different folks.

mick, has some pretty big CC debt
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Hi Mick,

I'm curious about your statement. "I currently have $215K in CC debt and I couldn't be happier!"

Would you be willing to share more as to why you are happy with the debt?


Sincerely,

ethan2007
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I'm curious about your statement. "I currently have $215K in CC debt and I couldn't be happier!"

Would you be willing to share more as to why you are happy with the debt?



Sure, ethan with numbers.

The average rate of that debt is under 2%. We just completed a home renovation and used mostly 0% and one or two 1.99% balance transfers to finance it.

We actually initially funded everything with our a CC that gets us air mileage and points and then we transferred the balance over to the no/low rate card from there.

There's nothing wrong with Kahuna's no CC debt policy; it's just a different - and not necessarily right for everybody - financial opinion.

mick
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