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I have 3 credit cards with a total balance of about $36k. Two of the cards are at 2% and the last one is at 0%. With the current payment structure, I'll be debt free in 25 months.

I recently came into some money and combined with my savings I can pay the entire balance off. However, I'll be left with zero dollars to my name.

Given that the interest rate is pretty low for the cards (I've calculated that I'll pay about $550 in interest over the next 2 years), should I pay it all off now and just keep on paying the monthly payments for the next 25 months?

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    Where do you get these credit cards that have 0% interest? How long is that rate going to last?
    – DJClayworth
    Apr 8, 2011 at 20:40
  • @DJClayworth See my answer in the comments of the linked question.
    – NeedAdvice
    Apr 9, 2011 at 6:52

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It's a good idea to have some emergency money so I would propose a plan that keeps some in your savings:

  • Pay off the ones with 2% in full.
  • Take your time with the one that is at 0%. You aren't losing any money on it.

If the 0% goes away, then consider paying it off, but by that time hopefully you have built up your savings a bit more.

Also consider the ability to move the balance from the 2% cards to the 0% one, if that is possible.

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    Moving a balance often includes a balance transfer fee as a percentage of the transferred principle. If you have the money, don't waste it on extra balance transfer fees down the road
    – SpecKK
    Apr 9, 2011 at 0:41
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Pay it all off now before you change your mind.

Having an emergency fund is important but that assumes you'll have the discipline to leave it alone. Obviously, you don't or you wouldn't have amassed $36k in cc debt.

Regardless of the rates, your icome or any other factor, that's just way too much and a pretty good indication that you've got problems managing money. Pay them off now while you still can!

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    First, I think you're making too much of an assumption regarding the original source of the debt. Who knows how it came about? I once took out a $25k cash advance at 0% to do home improvement, rather than a heloc at 8%. Far from "problems managing money", that was a sound financial decision. That being said, your point is valid - [IF] the OP can't avoid spending the money in savings, then it would be best to use it to pay off the debt now. Otherwise, you open yourself to the cc company canceling the account and leaving you high and dry.
    – Yardboy
    Apr 9, 2011 at 0:49
  • Credit card companies wouldn't offer 0% teaser rates if they weren't certain that most will either fail to pay down the debt before the rate increases or do something that gives the company an excuse to raise it even sooner.
    – user3271
    Apr 9, 2011 at 1:18
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    @Yardboy, @user3271 The source of my debt is that my ex-wife went nuts towards the end of the marriage and I ended up being responsible for the portion of her madness. In general I am pretty disciplined with money - in fact I paid off a significant portion of the original debt.
    – NeedAdvice
    Apr 9, 2011 at 6:54
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Having a cushion / emergency fund will hopefully keep you from having to build up any more debt once your cards are paid off. I would increase your payments on the 2% cards to a point where you feel comfortable in how much of a cushion you have. Keep your payments steady on the 0% card.

Be careful and watching your statements each month, often having a credit problem in another account (electric bill, cable bill, etc) will allow credit card companies to jack up your rates unexpected. If that does happen, you've still got an emergency fund to pay them down quickly in the future.

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"Should I pay off the credit cards now or do the monthly payments thing?"

It need not be a binary choice; you could take the middle ground. Assuming that an emergency fund of $10-15k is sufficient, you could pay off one credit card and do the monthly payment for the other cards. With one card cleared, you may feel better.

I would choose to clear the card with the highest interest, followed by the smallest debt first as it's the mathematically optimum way. I should also let you know that there's this debt-snowball method which is not as optimum but has some valid reasons for existing. Choose the optimum way if you're financially disciplined.

p.s. I'm not trained financially, nor am I in the industry. Just my two cents.

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While C/C's have 0% interest this a good mechanism to manage debt. But they expect you will pile up a large debt and at then of the interest free period you will get hammered. So plan your exit strategy.

Plan to pay off the 0% cards at the end of the int free period and pay the other cards down.

Alternatively, What you could do is pay off the other cards now by drawing down on the 0% card if its possible. Then.all your debt is at 0% int. Also you are consolidating your debt into 1 account. When the int free period is over move the debt into a single personal loan if you don't plan on paying it all off immrdiatley In the meantime put you savings into an interest bearing account to maximize the value of your savings.

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Why not use the money and pay the cards off? You say you'll have no money to your name, and while that's true, you do have $36,000 in available credit should an emergency arise. If it were me, I'd pay them off, make every effort to live on the cash I have without using credit and leave the cards open as a source of emergency funds (new home theaters are not emergencies!) until I got enough savings built up to not have to use credit at all.

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  • $36k would not be available to me. These cards were consolidated via credit counseling agency and thus are closed for anything other than paying them off. Plus, my credit is massively trashed. See my other questions for more details on my predicament.
    – NeedAdvice
    Apr 9, 2011 at 6:55
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I would say it depends on what your long term plans and goals are. If you are trying to get rid of credit cards and never use them again, then I would say to keep $1000 as an emergency fund, pay the cards off and then save to build your emergency fund up to 3-6 months expenses.

However, if you are just going to run the balances back up, I would save save 3-6 months expenses out of the money you just received and pay down the higher interest cards with what is left over.

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Consider searching locally for a rewards checking account. There are some that must be opened nationally, but you can likely find a local bank (or perhaps even two) that offer these high yield checking accounts. They will generally pay more than the interest you have on those cards.

Try This site to see if one is offered locally to you.

These accounts typically require the following:

  1. A direct deposit(s) of some sort monthly -- most will allow for an ACH as well
  2. Varying numbers of debit transactions a month.
  3. That you only receive an electronic statement.

In return you get higher interest rates, and most credit you ATM fees. The amount is generally capped between 10K to 25K on the high interest rate, and you'll generally receive a small rate for anything above that.

I'm in a smaller city, and I have one local, and one within a 45 minute drive. If you have a job that allows for split direct deposits, this is even easier. We never have any trouble knocking out the required debit transactions, but you MUST look at the balance as being an emergency fund, rather than a checking fund with an available balance. If you find two near you, you can probably earn ~$130 a month in interest. That's way more than you pay monthly... I vote to put it to work for you before paying it off.

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  • You can also search "Town name" rewards checking.
    – Scott
    Apr 12, 2011 at 14:57
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2% is a very low interest rate; you can do much better by investing your new found money on a 2 year CD, or short term bonds. You could pay the 0% card according to the terms as well. Therefore, considering the low rates of your cards, you should check into some safe investments with guaranteed return rates.

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    Current rates on 2y CDs are only about 1.5%
    – bstpierre
    Apr 8, 2011 at 23:20
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I would sit down with the creditors and negotiate smallest amount you can get before agreeing with whatever you have to pay. Think that, for them, it's much more convenient to get way less than $36K than to see you in collections.

Needless to say, don't tell them you have to money to cancel off :-)

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    This only applies if the debts are past due and they see a risk of not getting their unsecured money back at all. Given the exceptionally low interest rates in question, he is most likely current on all 3 cards and there's no reason to ruin his credit to get a deal he doesn't need.
    – SpecKK
    Apr 9, 2011 at 0:46

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