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I have $7000 in cash. What should I pay toward first?

  • Car Loan $17,000 @ 3.4% $532 a month payment
  • Credit Card $3000 @ 0% interest till March 2019
  • Credit Card $3800 @ 0% interest till Nov 2019
  • Credit Card $5000 @ 0% interest till Jan 2020

I would really love to get rid of my truck payment and play the balance transfer game while contributing towards each 0% card.

Thanks

  • 6
    What happens in March to that credit card rate? – mhoran_psprep Jan 21 at 0:53
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    Is $7k the only cash reserve you have? Unexpected expenses or time off work are one of the biggest ways people get into larger debt. Your cash reserve is the biggest thing keeping you from that. First thing to do is to stop adding to credit cards and find cash flow to pay down the debts asap. – T. M. Jan 21 at 0:57
  • I'm not adding any debt at all, haven't charged anything in years. I have been trying to get debt free for a few years already these balance were a lot higher at one point. Yes the $7000 would be using most of my savings, should I just use half $3500 and if so where should it go? Thanks – John Jan 21 at 1:08
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    You should edit the future interest rates of those '0%' loans into the question [ie: if the March 2019 rate will become 30%, probably best to pay that off before the 17k at 3.4%, even though interest is already accruing on it]. As well, what is your budget for future repayments you will be making over the next 24 months? – Grade 'Eh' Bacon Jan 21 at 15:33
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    I am paying more than the min on all the cards, $100 or more per card. I usually just keep playing the balance transfer game till I can pay them off. I have been successful with this in the past. I know $7000 is not enough to pay all credit cards off so I'm just interested in the best way to attack this. I will not file for bankruptcy, I have excellent credit with a score of 821 and will never ruin that. – John Jan 21 at 16:13
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Under the circumstances I'd suggest paying off the 3000 dollar card because in March it's interest rate is likely to skyrocket. Keep the rest in reserve for emergencies.

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    Not only is the interest rate likely to skyrocket, but depending on the terms, it's possible it would be charged retroactively if the card isn't paid off in time. – Anyon Jan 21 at 4:15
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    I'd add that the banks have been playing the balance transfer game harder and longer than you have. They allow ordinary folks to play because, statistically, people drop the ball and they get a windfall. – pojo-guy Jan 21 at 4:23
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    I play the zero balance transfer game very well, the banks have only made the percentage they charge off me which in some cases their was no fee and others 3 or 4 percent. March $3000 pay off looks like the smart thing to do. Thanks – John Jan 21 at 16:16
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I would really love to get rid of my Truck payment and play the balance transfer game while contributing towards each 0% card.

Getting 0% Balance Transfer may not be easy. Most institutions would look at a credit score that is quite high. So you may not be eligible. Plus there would be some hidden terms and conditions. Say if you are already on Balance Transfer on existing cards; you can't opt for Balance Transfer to another company and the cost would then be loaded. As you already have got 0% on a large balance, I am assuming you have done it once. The card companies may not allow it again.

Car Loan $17,000 @ 3.4% $532 a month payment Credit Card $3000 @ 0% interest till March 2019 Credit Card $3800 @ 0% interest till Nov 2019 Credit Card $5000 @ 0% interest till Jan 2020

Assuming you are paying off USD 100 per month towards the other cards ... the best way is to pay of USD 3000 towards the 0% March 2019 card as the interest rates may be quite high once it hits March. Paying this off may also improve your credit score.

Keep the balance USD 4000 as emergency funds. By Oct 2019; pay off the balance on the USD 3800 card from the emergency funds; to avoid the higher interest rates and Knock off the USD 5000 card of as much balance as possible. The priority should be to get rid of this balance ASAP. Then rebuild the emergency fund and then pay off the Car Loan with aggressive payments.

3

To effectively answer this question, we need details on what happens to those credit card interest rates when they rise. Let's assume for now that they all rise to 17%, which is slightly below the national average. Let's also assume you don't pay retroactive interest - that would make paying those debts even more important FWIW.

Those assumptions mean that come March, you can save $3000 x (0.17-0.034)/12 = $34 a month in interest by paying off the $3000 credit card rather than putting $3000 towards your truck loan. Note how I computed that by finding the difference between your two interest rates on the credit card and the car loan. So, unless you can come up with an additional $3000 to pay that March credit card before the APR jumps, best to put $3k towards it now.

Meanwhile, what to do with the remaining $4k in cash you have left over? That entirely depends on how much money you can save before your next credit card APR jumps up. If you use it to pay down your truck loan today, you'll save about ($4000 x .034) x 9/12 = $102 on interest before November (9 months away). BUT come November, if you haven't been able to save more money to pay off that $3800 credit card, you'll start paying ($3800 x .17)/12 = $53.83 per month for that credit card interest. So within two interest payments, you'll have lost all the $102 savings against your truck loan.

These numbers aren't accurate to the decimal place, since the interest payments decrease as you pay off the principal, but they're pretty close. Moral of the story, high interest debt = very very bad. Pay it off ASAP. The credit card debt will be even more of a drag if you have to pay retroactive interest. Potentially MUCH worse.

EDIT: You say "I would really love to get rid of my truck payment", but I would look at it differently, since you're only paying 3.4% interest (relatively low). I would say: "Gee, I'd really love to get rid of my high interest debt and then work on my truck loan!". It's certainly your prerogative to play the balance transfer game, but as my numbers above show, it only takes a slight miss and 1-2 credit card interest payments for that to be a losing strategy. Remember, once you've paid off your high-interest debt, you can then work on your car loan free of worry about any high interest debt, and you won't have paid too much interest in the meantime.

1
  • Car Loan $17,000 @ 3.4% $532 a month payment
  • Credit Card $3000 @ 0% interest till March 2019
  • Credit Card $3800 @ 0% interest till Nov 2019
  • Credit Card $5000 @ 0% interest till Jan 2020

You have $7,000 cash and from comments stated you're paying at least $100 per card while in 0% interest state.

There's a balancing act with debt repayment, you want to minimize interest, but you also don't want to put yourself in jeopardy of missing payments by having too little cash on hand in case of an emergency.

At a minimum per year you can pay ~$3,600 ($100/month * 3 cards), which means if you used all your cash on hand of $7,000 you'd be able to pay $10,600 toward your $11,800 in credit card debt by January 2020.

If you can find a way to up that from $300/month toward credit card debt to $500/month, you could pay off all the cards by Jan 2020 and have $1,200 in cash on hand as a little emergency fund. Then, after Jan 2020 you could roll that $500/month into a larger emergency fund and extra truck payments.

If there's no possible way to put more than the ~$300/month toward the credit cards, then you will need more time on one of the balances and if you can get another 0% transfer with low fee then it will likely make sense to do so, but you should probably pay off the March balance soon and then try for that transfer on the November balance, that should get you enough time to pay them all off without additional transfers after that one. And after they are paid off you can switch over to the extra emergency fund/truck payments as you would have otherwise.

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You should keep in mind that once you got rid of a card, its monthly rate will become available for other purposes.

So I think that for now you should keep your money. In March, you should pay off the remaining $2800 of the "March card" (am I right that there are two payments for $100 are still pending there?). This gives you $100 per month as "free" money and $4200 of remaining money.

In November, your balance of $3800 will have reduced by 10 × $100 = $1000. Your cash of $4200 will have increased by 8 × $100 (from the "free money" which went to your first card), so you'll have $5000 by then. Paying off the $2800 will leave you with $2200 cash and $200 per month of free money (from both cards)

By January, your "$5000 card" will have been payed off by 12 × $100 and will thus have $3800 of balance. Your cash, which was $2200 in November, will have increased by $400, so you have $2600 now. Paying them leaves you $1200 to pay for your card. If you do so by $300 a month, you are done four months later.

Afterwards, you can put the free $300 a month towards your emergency funds, your car loan or split it up.

This was all to avoid paying "big interest" on these cards. If you can do a balance transfer again, you should do it, but you should not rely on being able to do it once again.

Note that these considerations should only be your starting point. You should consider that this way, you'll have a low emergency funds at some time in-between. But on the other hand, any money that you are supposed to earn additionally in the mean time can either keep your emergency money high or can be used for paying off your car loan, reducing the interest there.

  • @John Note that on one place I was wrong with the numbers and thus edited my answer. – glglgl Jan 22 at 16:20
  • "You should keep in mind that once you got rid of a card, its monthly rate will become available for other purposes." That is very likely false. Many cards have deals along the lines of "The charges you make within the first 3 months don't have any interest for 12 months". – Acccumulation Jan 22 at 20:06
  • @Acccumulation That's a different topic. OP mentionned that they have a minimum payment of $100 per card (as far as I understood). Once a card's balance is gone, this minimum payment is (of course) gone and the $100 can be put elsewhere. – glglgl Jan 23 at 6:05
  • @glglgl I understood you to be saying "If you have $5000 at 0% and you pay it off, but then run low on money, you can go back and borrow $5000 again at 0% from that card." – Acccumulation Jan 23 at 15:48
  • @Acccumulation That was not my intent to say. – glglgl Jan 23 at 18:57
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As described, only the car loan is worth paying, and even that if you can't get better return than 3.4% on your money elsewhere. Others are a waste of money: It is always in your best interest to carry an interest free loan until the last day, assuming that you can guarantee you will be able to pay it off.

If you don't have the discipline to set aside money and not spend it, you have to weigh the risk of not being able to repay your credit cards when the time comes. On that note, the first credit card will soon stop being interest free at which point they'll slap you with a late fee and huge (20%?) interest. So if you asked this question 2 months later, the answer would be "forget the truck, pay the credit card". Will you have more money by then to deal with the credit card? If not, maybe start there for now.

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