Question on paying off credit cards

[JennyAnne]

Hi everyone!

I have a question on paying off balances on credit cards. I don't know if there is a right or wrong answer to this question, but my former DH and I always used to debate this topic (I won't tell you which side I was on). I'll use round numbers to make the scenario easier, but give me your opinion on which is the most efficient use of money.

You have two credit cards:

1. Card 1: Balance of $1,000/APR of 19%
2. Card 2: Balance of $10,000/APR of 8%

The card with the higher balance and a lower APR has a promotional rate for a year. So if you have $500 to pay toward a card, where is your money better spent? On getting the high APR low balance card knocked out first? Or on the card with the lower APR, since less of that $500 would be applied toward interest and more would be applied toward getting the balance down?

What is your opinion on this? Thanks in advance for your help!

[crazykids]

Personally what I would do is find a new credit card with a promotion offering zero interest. (There are plenty of them out there) I then would transfer over both of your existing cards thus combining them into one payment.

[January-2007]

I would pay off the one with the higher APR first.

[crazypoohbear]

I would pay off the higher interest rate first. plus it always feels good to pay off a card!
So where did you stand??

[Mom to a Princess and a Prince]

The higher APR. Soon that card will be paid off and then you can apply both card payments to the higher balance card.

[spoiledraf]

Pay off the high interst one immediatly and transfer the 8% to a lower rate card and don't charge any more. Easier said than done but the best way to do it.

Keep in mind if you go to a promation lower rate card with a discount rate on the balance transfer, and you start charging on that card at the normal rate, they apply all payments to the lower rate first, so what you are adding to the balance accumulates at a higher interest rate.

We got a really low rate for a balnace transfer on our Disney VISA and now we don't want to use it for vacations because our payments will go to the low rate (2.9%) first and the additional will be charged at a much higher interest rate. I told the wife we'll have to get a second card in her name for our next trip to take advantage of the perks.

[Jeff G]

I would definatley pay off the smaller credit card with the higher APR for two reasons. #1 any balance on a credit card over 50% of the balance will lower your credit score(even if it's only a few hundred dollar limit). #2 the obvious next month you'll have less interest compound on the lower rate card which will save you money. Plus you can take the money that you usually paid on the smaller CC and pay it extra to the larger CC which will reduce the principal balance quicker.

As for transferring CC's I also offer caution. If you planning on making any major purchases like a car or home in the next 12 months opening up a new account and throwing a balance on it will most likely bring the credit score down.


Etablished accounts with less than 50% of the balance generally wont hurt your score. New accounts and accounts with balances greater than 50% of the limit will hurt your score. Always avoid using a CC to the limit, the general hit to your credit score is 50 points or more. An example I can give is I have a cutsomer who makes $100K+ and has a mortgage, car and one small credit card with a limit of $700 on it. He's never missed a payment in his life and has at least 5 other cc's in his credit history all currently with $0 balances. When he came to me to purchase his new house his score was down to 688 which is good but not great. After reviewing his credit I noticed he owed $674 on the CC with a $700 limit. Before we did his purchase I had him pay off the CC and rescored him a few weeks later and his score was back up to 745 which is a very good score.

[JanetMegan]

Also keep in mind when you pay off the cards, do not cancel them, it lowers your credit to debit ratio so keep the accounts open and hide the cards in the freezer ;)

[BigRedDad]

This is what I would do:

#1 Get a home equity loan
#2 Pay off all credit cards
#3 Never get another credit card again

The reason is you will obliterate your financial future with credit card debt. While you are paying off those high credit cards, your money is not working for you. You will never come close to making the interest on investments that you are paying your credit card company unless you get very lucky.

Credit cards are only good if you pay them off each month.

[Tynkerbelle]

I'm in agreement with Jeff G. Pay the smaller card first and then apply the money that you would have used for that payment to the larger card. Also, be careful with transfers....

JanetMegan & BigRedDad made great points, too.

[brownie]

I'd put the $500 towards the card with the higher APR. I'd probably also look at transferring the remainder to the 8% card so it would have a lower rate and only one credit card payment would have to be made.

[DizneyRox]

Credit cards are only good if you pay them off each month.

Agreed... You need to get away from interest charges. What I would probably do is pay off the small credit card NOW. Immediately, 100% gone! Do whatever you need to do to get the $1000 together, stop smoking, eat ramen noodles for a month, stop the movies, and other entertainment, etc. You need to get those cards gone ASAP.

Now that you can save up $1000 in a month to pay off that first card, REPEAT the process until that second card is gone.

Of course, during all of this you must pay cash for all purchases. DO NOT continue to charge on those or any other cards, and more importantly, DO NOT charge what you can't pay off (in full) when that bill comes in next month.

It will be painful until they are paid off, but you'll learn a great lesson about managing money.

[JennyAnne]

Thanks for all of your opinions everyone! I will say that I was on the side of going the other way...paying on the credit card with the lower APR so that more of the money was being used to lower the balance. So we'll say that's ONE thing my ex-DH was right about. ;) My cards aren't quite that high...I just used round numbers to make figuring a little easier. I am coming through a divorce though, and have cut out just about everything I can. I drive a falling-apart car with no car payment, I never eat out, and I'm working a 2nd job this summer. I will get the lower one paid off first, it should only take a couple of months, and then I will work on the higher one.

Thanks for your help! I do appreciate it!