# Paying down debt during a no-interest period

In this question, the OP had three cards, and the one with the largest balance had a promotion of 0% APR for a limited time.

Normally, the most efficient way to pay down that debt is to start with the highest APR card... but what if the highest APR is the post-promotion card?

Example (based on the other post):

• Card #1: \$5600 balance, APR 7.24%
• Card #2: \$3710 balance, APR 16.24%
• Card #3: \$10,500 balance, 0% APR - was a balance transfer. In November, it will be 19.99%

In this scenario, should I pay down Card #2 first? Should I work on #3 so as to cut down on what the balance will be once the promo expires? Should I switch from #2 to #3 in November?

Assume that I have \$500 disposable income each month to channel towards paying down principle, and that minimum payments are covered.

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You realize, you changed the rates from the linked question? – JoeTaxpayer Jul 2 '14 at 21:42
Seems to be more suitable for math.stackexchange! – gnasher729 Jul 2 '14 at 23:27
@JoeTaxpayer - It wouldn't have been asking this particular question if I hadn't... but in retrospect, I'm wondering if I asked the question that I was thinking in my head or if I should have left them alone. – Bobson Jul 2 '14 at 23:38
FYI, use the equation t=72/r where r is the annual interest rate (19.99) and t is the time, in years, it takes the account balance to double if no payments are made. 72/19.99=3.6 years. 72/16.24=4.4 years. That 3.75% interest rate makes a huge difference in payoff time or total interest paid. – IceArdor Jul 3 '14 at 15:45

## 5 Answers

While the specifics would be different in particular cases (with regards to some universal idea of "Should I pay on a temporarily low rate debt?" question), without sitting down with a spreadsheet and doing the math, I would say - start paying #3 right now. It's (1) huge in comparison to the others and (2) will be a much higher interest rate when you get to it.

3710 * 16.24% = \$602 in interest in one year vs. 10,500 * 19.99% = \$2098

Obviously this little illustration simplifies reality, but the main point is still there - deal with the big ugly BEFORE the (let's be real) TWENTY PERCENT interest rate on TEN THOUSAND dollars kicks in.

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HOWEVER: I have to amend this answer on further thought.

You mention:

Normally, the most efficient way to pay down that debt is to start with the highest APR card.

This is not always the case. In some instances it makes more sense to pay off the smaller one because you can quickly discharge the debt in full and then use the money you were throwing at minimum payments toward discharging the next one more quickly.

Without knowing what your minimum payments are I can't run the math for you. But you SHOULD run the math, both because it will provide you with the best real answer, but also because its a good exercise to help see how debt service actually works.

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Thoughtful response, +1 for "not always the case...". – Pete Belford Jul 2 '14 at 19:44
I think the best scenario would be to try and consolidate all the debt into one account as to avoid the issue of wasting minimum payments on lower debt. This assumes that you can consolidate with zero additional fees. – Triplell89 Jul 2 '14 at 19:46
It is always the case that it's best to pay down the highest active and imminent interest accounts, as far as total amount spent. The "not always the case" only applies when one wants to eliminate a monthly payment for month-to-month budget flexibility (at the expense of paying more in interest on other accounts) – Noah Jul 2 '14 at 19:47
Yeah... I may have exaggerated the APR difference a bit too much in adapting the question. The original had 19.24 for #2 and 18.99 for #3, which is much closer. – Bobson Jul 2 '14 at 20:28
Human beings are not rational and life is highly unpredictable. It may (MAY) be more prudent to lose a little bit in the long run in order to gain a little bit of month-to-month breathing room. – Adam Wood Jul 2 '14 at 20:39

## Short Answer

Pay on Card #3. Much like if the card were currently charging interest, you want to pay off the cards that have the highest imminent interest.

## Assumptions

1. Assuming the minimum payments on the two = only paying interest (for the sake of the calculations).
2. Assuming interest calculated monthly on month-end balance.

## Breakdown

Card #2's interest savings from 4 (August, Sept, Oct, Nov) months of payments is about \$27.07. The value of the card goes from \$3,710 (accruing \$50.21 in interest) down to \$1,710 (accruing \$23.14 in interest.

Card #3's potential interest savings from making the 4 payments is about \$33.32. The values goes from \$10,500 (which would accrue \$174.91 in interest the first month) down to \$8,500 (which would accrue \$141.60 in interest the first month).

If you pay down Card #3 and make minimum payments on Card #2, you'd end up accruing \$191.80 (\$141.60 + \$50.21) in interest in November.

If you pay down Card #2 and make no payments on Card #3, you'd end up accruing \$198.05 (\$174.91 + \$23.14) in interest.

## Notes (and edits)

• No matter what the minimum payments are, you'll still be better off (long-run) paying down #3 first.
• These values only consider the interest accrued on Cards #2 and #3. Card #1 is fully ignored for this answer.
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Is my math wrong? I got 176.33 the first month assuming daily interest. – Triplell89 Jul 2 '14 at 19:48
@Triplell89 Assumption of monthly interest edited into answer – Noah Jul 2 '14 at 19:51
He said APR, which would elude to the interest being compounded daily. Should note, it doesn't matter, overall your advice is still correct. – Triplell89 Jul 2 '14 at 19:54
Ummm... I feel like you are mixing card #2 and #3 there. – Braiam Jul 3 '14 at 4:29

July just started, I'd let the 0% card float for now, and pay as much as I can on the 16.24% card.

Once the 19.99% card is back, I'd charge on the lower two cards right to the max, and use every cent I could raise to pay that 19.99% card off. And yes, if I could borrow at 5% from my 401(k), I'd do that to pay this all off and then make aggressive payments back to the 401.

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Charging on the lower interest card to free up cash for the higher interest card is interesting. I think it would be great for a rational person with good self control. But it seems to me that the existence of this much CC debt is evidence against the conclusion that the original poster would be able to successfully pull this off. – Adam Wood Jul 17 '14 at 2:01
Adam, you are absolutely right. My answers tend to ignore the psychological aspects of money and focus on the numbers. Which is why I believe a 401(k) loan can be a valuable tool, yet accept the criticism that it's a financial time bomb for some. – JoeTaxpayer Jul 17 '14 at 2:17

Simple answer: If you pay back either card 2 or card 3, you will be reasonably close to optimal, and each is an awful lot better than paying card 1 or paying nothing. Just to avoid the situation where you can't decide which of two possible good choices are the best and end up picking neither choice.

If you pay \$100 towards card 2, you save \$16.24 per year. If you pay \$100 towards card 3, you save zero until november, and then save \$19.99 per year. So there are 4 months where you are \$16.24 p.A. better off paying card 2, followed by a long time where you are \$3.75 better off paying card 3. \$16.24 times 4 months divided by \$3.75 is 17.3 months. So by november + 17 months = March 2016 you will be better off paying towards card 3. You won't have repaid your cards by that time, so paying card 3 is better.

But importantly, either decision is a lot better than doing nothing!

PS. with the original numbers 19.24 percent and 19.99 percent, it's \$19.24 times 4 months divided by \$0.75 = 102 months. Pay off card 2 first because it takes 8 1/2 years to break even if you pay card 3 first, and by that time your cards should be long paid back.

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There is zero point paying anything more than necessary towards #3 during the 0% period, as until the APR increases it isn't costing you anything. However when the promotional rate is over it will start costing you the most, so you're best bet is to be ready to make a big payment towards it right before then; this is easy enough to do by simply keeping the cash you would have used for payments in the bank. Unfortunately it doesn't sound like you'll be able to clear either of your other cards completely before November, so paying more towards them won't free up cash to pay off #3 until after that starts charging you interest.

It depends on your circumstances of course, but personally I would start looking for another 0% offer to transfer card #2 onto right now. Say this was a 12 month promotion, it would give you an extra six months to pay down #3 and reduce what it will cost in the long term. If your limit was high enough you could even roll both card #1 & #2 onto a 0% offer (check the fees, but most likely they will be insignificant compared to the interest saving).

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Finding another credit card promo and transferring a balance is likely to harm OP's credit score and also discourages OP from getting rid of credit card debt, even if the numbers make it look like a better option. – IceArdor Jul 3 '14 at 15:39
The numbers demonstrate it is a better option. It may affect his score slightly, temporarily, but his borrowing wouldn't increase and why would his score matter short term if his goal is to pay off the balances? As for the 'discouragement' factor, I think that's for the OP to consider not us. – b3njamin Jul 4 '14 at 8:15