The Credit Card Two-Step
I’m faced with a stark decision at the moment. My husband and I are lucky enough to have a couple of small windfalls coming in within the next 4 weeks, both of which are going to be put towards paying down our credit card debt. We have three cards with varying amounts on them, all of which we can handle, but would rejoice from seeing dead and gone.
Card A currently has a 3% APR interest rate. It has the smallest amount on it. We could wipe this card out with our windfall payments.
Card B has a 22.4% APR interest rate. It has the most on it. We could wipe out 30% of it with our windfall.
Card C has a 15.78% interest rate. It has more than A but less than B on it. We could wipe out 60% of it with our windfall.
So, my decision is where best to apply my money. There’s a certain satisfaction in seeing one card wiped out to zero, but would that be foolish as I do have such a wonderful APR on it? If I paid the windfall into C and transferred the remaining balance to A (to take advantage of the good APR) then that would wipe out *that* card. Common sense tells me that I ought to put the money against the biggest figure with the highest APR, but my gut tells me that as it would only be 30% of the total, I wouldn’t feel like I had acheived much, and our monthly outgoings would still be very high (if we wiped out one of the other cards entirely, we would at least have one less payment to worry about every month).
Decisions, decisions.
What would *you* do?
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Comment by Lissa Allcock
So long as it doesn’t cost you money each month to make the payments then I’d probably pay the 30% on card B because it will actually save you the most money each month. I understand the lure of the one less payment/I’m done with that solution, but the end goal is to be spending less money each month on interest to wipe away the overall debt faster, and from that point of view B is the way to go.
Is there any scope for transferring part of any of the balances to card B even without paying off a large percentage of it? I haven’t actually done the math but if it will save you more money to pay off C and transfer remaining balance to A but you can’t transfer balance without doing that paying off then that would be better. Maths time I’m afraid!
Comment by plonkee
Really, you should pay the money onto card B, and make some sort of fancy overall debt chart so you can see what a big difference it’ll make. In practice I’d do this
“If I paid the windfall into C and transferred the remaining balance to A (to take advantage of the good APR) then that would wipe out *that* card.”
It’s like neither one, nor the other, but it would have the benefits of reducing high interest debt, and paying off a card.
Comment by otherdeb
I was just watching Suze Orman’s show on finances last night, and she noted that you should always pay off the card with the highest interest rate first. Of course, what you do is up to you, but her advice is generally sound.