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I'm getting a chunk of money - $10,000. I have 2 credit cards, each with $8,000 on them. Both have the same interest rate. Should I put $5,000 toward each of them? This way, would my monthly bills go down and make it easier to see the light at the end of the tunnel on both of them?

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    Is this chunk of money taxable? Is it a loan that needs to be repaid? This is important to the question because if it is taxable, you'll owe part of that $10000. If it is a loan you need to consider the loans repayment terms against the credit card repayment terms. – Freiheit Sep 12 '16 at 13:44
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    Obviously call up both credit card companies and try to get a better rate, then pay off the other one. :) – corsiKa Sep 12 '16 at 23:54
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    Interesting bug in the hot network feed i.imgur.com/Rtpn6hc.png – Auxesis Sep 13 '16 at 16:18
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    @Tratto It's probably because you browsed it on a SE site with Mathjax on. Mathjax is a technology to parse mathematical formulas in posts, and it uses dollar signs as delimiters (for instance $2^4 + 1 = 17$). – Federico Poloni Sep 13 '16 at 17:28
  • @Tratto Good catch. Post on meta.stackexchange.com. – jpmc26 Sep 13 '16 at 23:41
121

If the rate is the same, then clearing one card to zero does have one advantage: getting your grace period back.

Generally when you owe money on your credit card, and you make a new purchase that new purchase get charged interest starting on day one. But if you are not carrying a balance, in other words you pay off the charges every month, then new purchases aren't charged until you fail to pay the balance by the due date. That grace period can be 25 to 55 days depending where you are in the billing cycle.

Having one clean card will allow you to use that card when you have no other choice. Lets say you have an emergency car repair while away from home. You don't have $500 in cash so you put it on the clean card. When you get home you know that you can pay the bill and not have been charged interest.

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    +1 Also, when the first card is paid off, you can take the money you were paying on that card to help pay the second even faster. You can't do that if you split the $10k. – senschen Sep 13 '16 at 11:31
  • @senschen If you split it, your same payments will still pay off the depth faster. Just considering interest, it doesn't make a difference unless there is interest on the interest and this shouldn't happen when paying back the depth. – Nobody Sep 13 '16 at 22:15
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    @Nobody - Only if you're just considering interest. If you consider the minimum amount due, and assume someone only paying that amount, then they end up ahead by paying off one card in total over splitting evenly. This is because the min amount due has to, by law in the US at least, include more than the interest accrued so that the borrower will eventually pay off the debt. If they pay $0 to a second card, but keep up the same amount to the 2nd card, they're paying off the principle on the 2nd card faster than they would be splitting across 2 cards. – davmp Sep 13 '16 at 22:46
  • @Nobody If nothing else, from personal experience I can say that it at least feels faster when you pay one in total. The debt snowball is real, and there's a reason its such a popular method for getting out of debt. But @ davmp above is right about the minimum payments, too. – senschen Sep 14 '16 at 11:23
40

I would take a closer look at each provider.

I have one credit-card provider who when there is a large portion of credit available, they frequently offer promotions on balance transfers so you fill that credit, sometimes it can be 0% for xx months, or a very low % until paid off in full. If this is the case clear that card fully and balance transfer the remainder to get an even lower interest to make the repayments eaier to clear.

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    This is the best answer. You say you have an interest rate; 0% is better. – axsvl77 Sep 12 '16 at 5:33
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    Just be sure that the balance transfer fee doesn't offset any savings you might have. Many of my cards vary their transfer fees and it can be easy to miss that it was 3% last time they made an offer, but it's 5% this time. – BobbyScon Sep 12 '16 at 20:08
14

The best approach depends on how much of an emergency fund you have.

If you have no emergency fund

Calculate how much you need in order to pay your expenses for 1 month and put at least that amount in a savings account. 3-6 months' worth of expenses is better. Put the remainder towards one credit card.

If you have less than 3 months' worth of expenses in your emergency fund

Deposit 1 additional month's worth of expenses into your savings account and apply the rest to one card.

If you have an emergency fund that you're completely comfortable with

Pay $8000 towards one card and $2000 towards the other one. Paying off one card fully gets rid of a bill that you have to think about each month, even if the two cards are otherwise identical.

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    Provided you have sufficient credit remaining on the cards, it's more common to consider those the emergency fund while you work on getting the hideously expensive credit card debt out of the way. – Lilienthal Sep 12 '16 at 21:10
  • @Lilienthal That's a fair point; you can save more money on interest payments that way. OTOH, it's better to have cash to cover emergency expenses rather than add more to your CC balance. Also, IME you can't pay rent using a credit card. Ultimately, it comes down to a risk assessment. – Brian Sep 13 '16 at 15:25
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    While having an emergency fund is great. The best investment you can make is paying down debt NOW! – Anthony McCloskey Sep 13 '16 at 23:01
  • @Brian Available credit is functionally the same as cash though. I believe the inability to pay rent by card is because landlords don't appreciate paying the fees so renters can get that percentage cashback. I believe you can still withdraw cash from your card to pay that way, though withdrawal limits could indeed be a concern. – Lilienthal Sep 14 '16 at 8:18
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    @Lilienthal In addition to withdrawal limits, my cards have different rules for purchases vs. cash advances. A cash advance is much more expensive than a purchase, with interest being assessed immediately instead of at the end of the billing cycle. – Brian Sep 14 '16 at 15:08
8

Also, unless I missed it and someone already mentioned it, do keep in mind the impact of these credit cards balances on your credit score. Over roughly 75% usage on a given credit account reflects badly on your score and has a pretty large impact on how your worthiness is calculated. It gives the impression that you are a person that lives month to month on cards, etc.

If you could get both cards down to reasonable balances to where you could begin paying on them regularly and work them down over time, that will not only look incredible for your credit report but also immediately begin making your credit worthiness begin to raise due to the fact that you will not have accounts that (I'm assuming here) are at very high usage (over 75% of your total limit.)

If you have to get one card knocked out just to get breathing room, and you're boxed in here -- or honestly even if the mental stress is causing you incredible hardship day to day, then I suppose blow one card out of the water, reassess and start getting to work on that second card.

I hope this helped, I'm no expert, but I have had every kind of luck with credit cards and accounts you could think of, so I can only give my experience from the rubber-meets-the-road perspective.

Good luck!

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    The card happen to have total $16K owed. How can you make any assumption about this member's total credit lines? She may be at 10% utilization. Or right at 100%. There's nothing in the question that gives us a hint of this either way. – JTP - Apologise to Monica Sep 12 '16 at 1:53
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pay off one of the cards completely. there are several reasons why:

  1. if you don't have another credit card for your current spending, then paying off one card completely will get your grace period back. this will save you interest every month on the purchases you make. assuming you continue to pay the card off every month, you will pay no interest.
  2. when you suddenly pay off a large balance, credit card issuers usually respond by increasing your total credit limit. the increased credit limit can improve your credit score by lowering your utilization ratio.
  3. when you stop carrying a balance, issuers frequently send you a promotional balance transfer rate offer. you can use a balance transfer offer to transfer the balance from the other card to a lower rate. accepting a balance transfer offer on a card that already has a balance is usually foolish because your payments will be applied to the lower interest balance first.
  4. one card might have a higher annual fee. paying off this card will allow you to close the account (or convert to a no annual fee program to keep the account on your credit report longer).
  5. one card might have a better cash-back program. paying this card off will let you save interest while using it to get cash back on monthly spending.
  6. one of the cards might have a larger minimum payment. paying off this card will improve your monthly cash flow.
  7. having a card completely paid off can have a strong psychological effect since it is a concrete milestone.
5

If both cards have the same interest rate, there's likely no practical difference here. Very likely, the required minimum payment is calculated the same on both cards. Pay off one card and put the rest on the other, or split the payment across both cards. My personal preference would be to entirely pay off one card and put the rest on the other. It feels like a bigger accomplishment.

If one card has a significantly different interest rate, obviously you'd try to pay that one down first. Alternatively, if you owe less on one card, you may choose to pay that off and then cut up the card, if you are trying to recover from a poor financial situation. This way, you have achieved a specific goal. But again, in your case, it sounds like your two cards are entirely interchangeable.

Either way you do it, well done on putting your money where it'll make the most difference right now.

2

So my advice for your financial situation depends on your aims. Are you aiming to: - Completely clear your debt - Clear one card to free up more monthly income. - Clear some debt to allow further controlled spending - Clear one card and focus on just using one, having 2nd as emergency.

There are other things you may wish to do but you said to pay off some / all of 2 credit card bills. If you want to contact me I can plan this more precisely. Some seem the same but other factors can come into play as well. Differing rates of interest make the options clearer. My first advice would be to call the card companies and see if you can get better rates first.

SCENARIO (some figures made up for visual) Credit Card Debts 8,000 8,000 Monthly payment 100 100 APR % 10 10 Ignoring APR this will be 80 months to repay (otherwise 140 months using my example amounts above)

£28,000 repaid over 11 years 8 months.

Your Suggestion As per your suggestion originally, paying off cards equally will allow smaller debt on both cards. Credit Card Debt 3,000 3,000 Monthly payment 100 100 APR % 10 10 With a 0% APR this would be paid off in 2 years 6 months. Cards are available to get free balance transfers, need to look into this. With the 10% APR this would take 3 years 1 month.

£10,000 lump and £7,400 repaid over 3 years 1 month (saving £10,600 and 8 years 7 months)

AIM: To clear debt completely. My advice here is to use the £10,000 lump sum to pay off one credit card, the remaining £2,000 can then come off the other card. This will free up your outgoings (was 2 x £100) by £100. But then use this £100 to pay off the card, this will result in the following: Credit Card Debt 6,000 Monthly payment 200 APR % 10 With a 0% APR this would be paid off in 2 years 6 months. Cards are available to get free balance transfers, need to look into this. With 10% APR this would take roughly 3 years 1 month.

£10,000 lump and £7,400 repaid over 3 years 1 month (saving £10,600 and 8 years 7 months). This option is the same as above, but you have the options on the odd tight month to reduce payments to £100. This also will allow the 2nd card to be used interest free for an emergency purchase (to be paid off without any interest charge) If rates are different, pay of the one with the higher APR

AIM: Clear one card to free up more monthly income. AIM: Clear one card and focus on just using one, having 2nd as emergency. Same as above, but don’t increase to £200, leave monthly payment at £100. Credit Card Debt 6,000 Monthly payment 100 APR % 10 With a 0% APR this would be paid off in 5 years. With the 10% APR this would take 88 months (7 years 4 months)

£10,000 lump and £8,800 repaid over 7 years and 4 months (saving £9,200 and 4 years 4 months). This also allows for some extra spending (even racking back up the debt – although not advised)

AIM: Clear some debt to allow further controlled spending As above apart from this will allow you to spend to get back up to full £16,000 debt.

NOTE My figures are theoretical, paying off £500 (£250x2) a month instead of the £100 (10%APR) would take: Lump sum 10,000, remaining 6,000 – 14 months (£17,000 paid) Lump sum 5,000, remaining 2 x 5,500 – 26 months (£18,000 paid) Lump Sum 0, remaining 2 x 8,000 – 40 months (£20,000 paid)

Now I have finished waffling, I hope you have an idea on what you are aiming to achieve and a better idea of what to do when you receive the income 

Stephen.

1

Here is what I would do (my wife has done this and it worked great). Pay off one card. Pay down the other card then find a new card that offers a 0% period on balance transfers. They generally have between a 1%-5% fee with 3% being pretty typical. You will get probably 18-24 months of no interest. At the end of that period, provided it isn't paid off, just open another card and do another balance transfer. After you are done paying everything off get a card that offers cash back bonus and pay for everything using that card, pay the card off at the end of the month.

-4

If I were you, I would pay one of them off completely, then cut the card up and close the account. I have the feeling that you would be better off with just one card. That's all I've ever had and I've never needed a second one. It can help keep you out of trouble, too. Then I'd apply $1000 to $1500 towards the other card, and blow the rest on something stupid. Win-win.

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    Whilst it may be fun, this is terrible financial advice. – Trotski94 Sep 12 '16 at 8:47
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    Having an empty card available would be more useful. If you don't trust yourself not to use it, consider how you might make it available only for emergencies – Chris H Sep 12 '16 at 10:54
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    Was with you right up until "and blow the rest on something stupid." – djechlin Sep 12 '16 at 20:37
  • If the OP is running a $16K balance on credit cards (what the H-E-double-hockeysticks?), blowing $500-1K(5-10% of the total) might actually have some useful psychological appeal as a reward.. or something. – Spehro Pefhany Sep 13 '16 at 15:11
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    This really is truly terrible advice. Closing the account will lower your total "available credit" and even though you will have paid down a lot of debt, you will likely have negatively impacted your overall debt ratio, and damaged your credit score if you follow this advice. – Anthony McCloskey Sep 13 '16 at 23:04

protected by Chris W. Rea Jan 11 '17 at 1:09

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