which CC to pay off? finance question

[rattlsnak]

Had a discussion with a friend, who has three credit cards. 2 with @ $5,000 balance and 1 with a @$10,000 balance. He has $10,000 to use to pay off some debt. Which would be better... to pay off the two with $5,000, or the one with $10,000 ASSUMING all things equal, like interest rates are the same, etc... Right now he only pays minimum payments on all three and he will only be able to pay min on whichever cards he has left.
I would think its better to pay off two cards than one, but actually, the finance charge on the two smaller cards combined is a little cheaper than the one big card. Right now he is paying @$550 a month on these three cards, so paying off the two small ones or the one big one would reduce his monthly bill to the same thing @$300.00. So which route would be "smarter"?

[Eric Coffey]

I would try to equalize each card's balance/limit ratio, with more going towards whatever card is closest to it's limit, then to whichever ones have the highest rates. If all rates and all limits are the same, I'd put $7k towards the $10k card, and $1.5k towards each $5k card. Or, if you plan on using one more that the other(s), pay that one down more.

There is usually no upside to actually closing an account (rather than just paying it down), especially if it is one you have had for a long time. Also, tell him to make more than the minimum payment each month, even if its only by a few dollars more.

[Jim Bremner]

The one with the HIGHEST percentage rating to the lowest!

My wife paid off the family hailer early, it was at 0.9% but our other car was 5.5%

I tried to explain it to her, tht it was better to let the family car time out and pay down the other car first.

"but we owed 5k on the family hauler and we owe 7.5 on the other car, I'll feel better paying off the 5k!

WTF! you just cost us $800 for "feel good" take that to the grocery store and buy some steaks with "feel good"

[island911]

"Math - in the real world you'll never use that stuff"


Seriously, there are some online amortization calculators. Have your friend punch the numbers.

[masraum]

Pay off the two 5k cards and then put as much as possible each month towards paying off the 10k card. Seeing only 1 bill is usually more of a morale boost than seeing multiple. That morale boost can help towards continuing to pay things off. After he pays off the 10k regardless of which cards, he should continue to pay 550 a month on whatever's left, not pay just the minimum.

If possible, after the payoff, make a balance transfer for a lower rate. That can be beneficial. With most credit cards, the monthly finance charge is close to the minimum payment, so you'll end up paying forever. A couple of years ago, my wife got an offer for a 0% balance transfer FOREVER. We are still paying regularly on that card and paying no interest on it so every payment is all principal. That's almost the only card left, and should be done within a year.

[Eric Coffey]

Originally Posted by masraum

Pay off the two 5k cards and then put as much as possible each month towards paying off the 10k card.

Only problem with that is if the two $5k cards have been opened for a long time, it will ding his account history ratio. Keeping the $10k card that is close(r) to it's limit will tank your FICO as well. Having 3 cards with stable history and good balance-to-available-credit ratios is much more favorable than cutting it down to 1 card that is close to it's credit limit.

I should have clarified that my replies are weighted toward maintaining/reestablishing a good credit score, which is not necessarily the quickest path to debt repayment.

[rattlsnak]

Here is what he says:
He cannot continue to pay the 550.00 a month. That monthly bill must come down. He doesn't know for sure what the interest rates are, but he thinks they are all "about the same" and he has had all three of them for @ 6-7 years and they are all close to the limit.

His primary goal here is to lower his monthly bills, while paying off the debt is "secondary", which is why he has to either pay the big one or the two little ones off as either way would lower his monthly bill the same amount.
He's trying to think ahead and see which way would be the best way from a financial point of view while maintaining his goal of a lower monthly output.

So at this point, assuming everything equal, would paying the min payment on two cards at a lower balance be better (quicker) than paying the min payment on one big card with a higher balance?
Which way would the other card(s) be paid off first? or cheaper? I would think time would be a factor as the longer you pay on them, the more you pay in charges...

[island911]

Originally Posted by rattlsnak

H... He doesn't know for sure what the interest rates are, but he thinks they are all "about the same" ...

This is rather key to the decision process. Find out.

[Tidybuoy]

Originally Posted by masraum

Pay off the two 5k cards and then put as much as possible each month towards paying off the 10k card. Seeing only 1 bill is usually more of a morale boost than seeing multiple.

Totally agree

Originally Posted by Eric Coffey

Only problem with that is if the two $5k cards have been opened for a long time, it will ding his account history ratio.

I don't agree because it should only affect the credit rating if the accounts are closed. I would pay them off but not close the accounts (assuming they are revolving credit accounts).

____________

With the two 5k accounts gone, it may be easier to pay the $10k account because some times the min pmt for the 3 cards may be more than 1 car with a 10k larger balance.

I think the most important thing is to get them all paid off rather than worry about your credit rating. I suspect that the credit rationg is not too good at the moment with that amount of debt and only being able to pay the minimum.

Where is he getting the $10k to pay off the debt?

[onewhippedpuppy]

Originally Posted by masraum

Pay off the two 5k cards and then put as much as possible each month towards paying off the 10k card. Seeing only 1 bill is usually more of a morale boost than seeing multiple. That morale boost can help towards continuing to pay things off. After he pays off the 10k regardless of which cards, he should continue to pay 550 a month on whatever's left, not pay just the minimum.

Bingo. Paying debt is all about traction and staying the course. Two less bills is a great motivator.

Originally Posted by Eric Coffey

Only problem with that is if the two $5k cards have been opened for a long time, it will ding his account history ratio. Keeping the $10k card that is close(r) to it's limit will tank your FICO as well. Having 3 cards with stable history and good balance-to-available-credit ratios is much more favorable than cutting it down to 1 card that is close to it's credit limit.

I should have clarified that my replies are weighted toward maintaining/reestablishing a good credit score, which is not necessarily the quickest path to debt repayment.

Then it's stupid. Why pay out more money in the hope that you will maintain a higher credit score? Staying in debt for a higher credit score is asinine. The entire idea is to get OUT OF DEBT so you can pay cash for stuff. If you actually have money, you don't need debt.

I'm always curious where the information in regards to a high credit score comes from. It seems that there are so many urban legends as to how to maximize your credit score, and they all require being in debt and extensively utilizing debt. Ever think these rumors are propogated by the credit card companies to keep you on the hook? I've never carried a balance and never had a car loan in my name, my first debt was a mortgage. I didn't even have a credit card until I got married. My credit score is nearly 800, good enough to get a loan anywhere I want. My wife has never carried a balance on her one credit card, had one car loan that we paid off early, and a mortgage that was also paid off early when we sold the house. Her credit score is about 825. Personally, I think most of the tips are total BS.

[kaisen]

Originally Posted by masraum

Pay off the two 5k cards and then put as much as possible each month towards paying off the 10k card.

This is the advice of financial experts, at least those I've heard or read.
Pay off the smallest ones first, regardless of rate, then work on the next smallest balance, and so on.

[afterburn 549]

Of course there the "bail out" method. You do not pay them anything for 90 days and then you offer a large amount of cash 1/3 to 1/2 to call it all done or they get NONE

[legion]

I've heard two different arguments on this.

The purely mathematical argument is that he should pay off the one(s) with the highest interest rate.

The more psychological argument is to pay off those with the smallest balances (to give himself a "victory") and then take then pay the same amount he would have paid on all three on the remaining one. Paying minimum balances is just treading water and should be avoided at all costs.

[masraum]

Originally Posted by afterburn 549

Of course there the "bail out" method. You do not pay them anything for 90 days and then you offer a large amount of cash 1/3 to 1/2 to call it all done or they get NONE

Right, I was curious about those things, so I called one. You stop paying, your debt goes to collections, after a while when your credit is ruined, you offer a low-ball payoff. If they accept, then come the next tax time, you get to claim all of the debt that they wrote off as income. Ouch, so you think you got free debt relief and then find out you're going to get dinged come tax time.

Sounds like a great option!

[onewhippedpuppy]

Originally Posted by masraum

Right, I was curious about those things, so I called one. You stop paying, your debt goes to collections, after a while when your credit is ruined, you offer a low-ball payoff. If they accept, then come the next tax time, you get to claim all of the debt that they wrote off as income. Ouch, so you think you got free debt relief and then find out you're going to get dinged come tax time.

Sounds like a great option!

Not to mention the fact that you're trying to get off of the hook for money you legitimately owe. Bad karma in my book.

[afterburn 549]

Hay! it is a legit option if it works for you..No one makes them agree to it, No diff then risk in other things.
Speak of BAD Karma, The banks and their owners have NO problem making you suck up for their bad deals...do they get bad karma ?
Never mind that can be an other thread
The man wanted options, I gave him one

[onewhippedpuppy]

Originally Posted by afterburn 549

Hay! it is a legit option if it works for you..No one makes them agree to it, No diff then risk in other things.
Speak of BAD Karma, The banks and their owners have NO problem making you suck up for their bad deals...do they get bad karma ?
Never mind that can be an other thread
The man wanted options, I gave him one

Never heard of a bank FORCING a consumer to sign up for a credit card, mortgage, car loan, etc. But it's really easy to blame someone else for your bad decisions.

[Eric Coffey]

Originally Posted by Tidybuoy

I don't agree because it should only affect the credit rating if the accounts are closed. I would pay them off but not close the accounts (assuming they are revolving credit accounts).

Sorry, I assumed that "pay off" meant closed. What you refer to (keeping them open) I mentioned in my first reply.

I think the most important thing is to get them all paid off rather than worry about your credit rating.

Absolutely. However, all things being equal as the OP mentioned, it wouldn't really matter how the $10k was distributed with regards to debt repayment. So, why not maximize the pay-downs to help heal your credit? In other words, if all of the cards are at or near their limits, it would be wise to pay them all down equally, as opposed to just paying down one to a zero balance, while leaving the other two at/near their limits (especially if the future intent is to keep making only the minimum payments).

[Eric Coffey]

Originally Posted by onewhippedpuppy

Then it's stupid. Why pay out more money in the hope that you will maintain a higher credit score?

WTF are you talking about? Where/when did I say to "pay out more money"?? He said that all cards were about the same interest. If they guy has $10k to pay down 3 credit cards, it will decrease his debt-to-income ratio the same no matter where it's put. Sooo, why not pay down the ones that have the most negative effect on his credit rating (the ones closest to the limit) first?

I sayI'm always curious where the information in regards to a high credit score comes from.

It's not some big secret/conspiracy. The way it is calculated is common knowledge and available all over the net. Obviously paying down debt in general trumps all, but paying off and closing an account that you have had for a long time negatively effects your average account history (which is just one piece of the pie of how your score is calculated).

It seems that there are so many urban legends as to how to maximize your credit score, and they all require being in debt and extensively utilizing debt.

You aren't getting it. The ways to maintain/salvage your credit score mentioned pertain to those WHO ARE CARRYING DEBT, and actually use credit (revolving, installment loans, etc.). Off course you will have a high(er) FICO if your debt-to-income ratio is nil.

I've never carried a balance and never had a car loan in my name, my first debt was a mortgage. I didn't even have a credit card until I got married. My credit score is nearly 800, good enough to get a loan anywhere I want. My wife has never carried a balance on her one credit card, had one car loan that we paid off early, and a mortgage that was also paid off early when we sold the house. Her credit score is about 825...

Do you want a cookie or a gold star? All meaningless and irrelevant to the topic at hand.

[techweenie]

Eric: the gurus say that the best FICO comes from carrying about 30% of your maximum balance on each card. With an improved FICO comes offers of reduced interest rates (eventually) - but this is all passive stuff.

Better to be proactive. If your friend calls and asks for a rate reduction on each card, the one that leaves his rate the highest is the first he should pay off.