Easy credit card question for those in the know about these things
February 21, 2020 8:29 PM Subscribe
How much should I pay down each credit card account?
I have just been finally paid $4000 from a contract. I don't need this money for anything but to pay down credit card debt.
I have one credit card on which I owe $7500 with 19.8% interest.
I have one credit card on which I owe $16000 with 20.99% interest.
Both cards are close to their limit.
Should I just put all on the larger debt and higher interest? Or is it better for my credit score to get both cards clearer of their limits?
In Canada.
I have just been finally paid $4000 from a contract. I don't need this money for anything but to pay down credit card debt.
I have one credit card on which I owe $7500 with 19.8% interest.
I have one credit card on which I owe $16000 with 20.99% interest.
Both cards are close to their limit.
Should I just put all on the larger debt and higher interest? Or is it better for my credit score to get both cards clearer of their limits?
In Canada.
Your credit score is not relevant here as far as I understand it. It depends only on the ratio of total debt to total credit limit. It doesn't depend on whether both lines of credit are $2000 clear of their limit, or one line is $4000 clear.
I believe individual ratios also matter. I think different scoring systems work differently but that at least some look at individual ratios.
Here's one last consideration: if at all possible, you want to get off these ridiculous interest rates. Will either of these give you a balance transfer offer where you pay 0% interest for a year or 18 months (usually for a fee like 3%)? Once upon a time I paid down one card ("Card 1") by a few hundred, putting it a few hundred dollars below its credit line, and then used a 0% balance transfer offer to transfer that full amount over from another card ("Card 2"), to take advantage of a 0% interest offer. This gave me a few hundred dollars of room on Card 2, so I took advantage of Card 2's 0% interest offer, and transferred that amount over from Card 1. My balances stayed mostly the same, but I got double the original amount into zero-interest offers. In any case, if either will give you a 0% balance transfer offer (of if you suspect they will once you pay them down slightly), consider paying that one. Lower interest rates will make a huge difference in how fast you can pay things off.
posted by salvia at 10:54 PM on February 21, 2020 [1 favorite]
I believe individual ratios also matter. I think different scoring systems work differently but that at least some look at individual ratios.
Here's one last consideration: if at all possible, you want to get off these ridiculous interest rates. Will either of these give you a balance transfer offer where you pay 0% interest for a year or 18 months (usually for a fee like 3%)? Once upon a time I paid down one card ("Card 1") by a few hundred, putting it a few hundred dollars below its credit line, and then used a 0% balance transfer offer to transfer that full amount over from another card ("Card 2"), to take advantage of a 0% interest offer. This gave me a few hundred dollars of room on Card 2, so I took advantage of Card 2's 0% interest offer, and transferred that amount over from Card 1. My balances stayed mostly the same, but I got double the original amount into zero-interest offers. In any case, if either will give you a 0% balance transfer offer (of if you suspect they will once you pay them down slightly), consider paying that one. Lower interest rates will make a huge difference in how fast you can pay things off.
posted by salvia at 10:54 PM on February 21, 2020 [1 favorite]
I think salvia has it. The best use of your money is to facilitate (probably via a 0% interest balance transfer) moving as much money as possible out from underneath the extortionate interest rates you're paying.
posted by Tell Me No Lies at 11:07 PM on February 21, 2020
posted by Tell Me No Lies at 11:07 PM on February 21, 2020
These resources from the Australian Securities and Investments Commission may be of use to you:
Credit card balance transfers
Credit card calculator
Personal loan calculator
In your position I would shop around all my local credit unions for a $23500 personal loan at some non-extortionate interest rate, use that to pay off all my credit card debt, then apply all of my $4k toward paying off the personal loan. Five figures is way too much to be paying for at ruinous credit card rates.
posted by flabdablet at 4:21 AM on February 22, 2020 [3 favorites]
Credit card balance transfers
Credit card calculator
Personal loan calculator
In your position I would shop around all my local credit unions for a $23500 personal loan at some non-extortionate interest rate, use that to pay off all my credit card debt, then apply all of my $4k toward paying off the personal loan. Five figures is way too much to be paying for at ruinous credit card rates.
posted by flabdablet at 4:21 AM on February 22, 2020 [3 favorites]
This wasn’t your question, OP, so I didn’t go into any detail, but the interest fee balance transfer idea suggested above is not always available (big balances and poor credit can be a problem). More importantly, even when they are, they can be an extremely dangerous approach if you don’t have the income and discipline to pay them off before the regular (very high) rate kicks in.
In other words, the specifics of your circumstances (which we’re lacking) could easily turn a specific refinancing plan from a good to a horrendous idea. Be careful!
posted by caek at 7:26 AM on February 22, 2020 [1 favorite]
In other words, the specifics of your circumstances (which we’re lacking) could easily turn a specific refinancing plan from a good to a horrendous idea. Be careful!
posted by caek at 7:26 AM on February 22, 2020 [1 favorite]
Caution: using a lump sum pay-down on a card near its limit can result in the limit being cut to just above the new balance, so your credit score may not be improved by the pay-down (though obviously your monthly payment situation would be improved). That may not happen or may not be relevant to you, but flabdablet's plan is a better approach if you can swing it.
posted by anadem at 9:03 AM on February 22, 2020
posted by anadem at 9:03 AM on February 22, 2020
Pay the smaller one and then QUIT USING THE CARDS. Then focus on putting any extra cash you can rustle up on your debt in addition to your regular payments. That's the only way to make progress on paying off debt. Debt can cripple you - learn to hate it.
posted by summerstorm at 9:19 AM on February 22, 2020 [1 favorite]
posted by summerstorm at 9:19 AM on February 22, 2020 [1 favorite]
There is not enough information provided to give the best answer. If you plan to use your credit cards close to their limits like this and this is just a temporary ebb in the flow of credit, then the answer is to put it on the higher interest card, which is also the highest balance in your case. This will save you about $50 a year going forward, with all else being equal. If your plan is to get out of debt or make it more manageable, here are some other strategies.
Firstly, when you make a purchase on your credit card you typically have a grace period before you are charged interest, normally one billing cycle. However this is only if you do not carry a balance, which it seems you probably do regularly. If you time your purchases around your billing cycle and pay your card in full each month, you could have just shy of 2 months interest free of all purchases, but if you carry a balance you typically start paying interest from day one of purchase. For this reason you always want one credit card that you can pay the balance off in full every month without fail. In your case, one option would be to get a third card which not many people would recommend. Another would be to get your first card down to a zero balance. Since you only have a $7500 balance on that one, the $4000 payment would be more than halfway, which is a good start. Paying this one down for this purpose is not exactly like the debt snowball method as it is strategic and not psychological.
A better strategy for you would be to transition from credit cards to a personal line of credit. Unlike credit cards, which are third party companies that partner with the banks, lines of credit are bank products and the interest rates, while higher than secured loans, are substantially lower than credit cards. Full disclosure, I used to work for RBC during university over 20 years ago, so I am more familiar with their products, but all the Canadian banks should have similar. An unsecured Royal Credit Line is about 6.5%. This difference from your CC rate would save you more than this $4000 every year and would make your debt growth more reasonable. The interest rate varies with the prime rate, but then so do the credit cards. Some other banks; TD 1, TD2, NBC, CIBC, Scotia, HSBC. Credit Unions probably have similar products as well.
These credit lines function somewhere between a loan and credit card. There is usually no grace period, either, so you would want to make purchases with your cards (one that does not carry a balance), which also typically offer other consumer protections, and then make payments with the credit lines when they are due. I would recommend talking to a personal banker at your bank about their products, what you qualify for, and a short, medium and long term goal for your circumstances.
posted by Yorrick at 11:40 AM on February 22, 2020 [1 favorite]
Firstly, when you make a purchase on your credit card you typically have a grace period before you are charged interest, normally one billing cycle. However this is only if you do not carry a balance, which it seems you probably do regularly. If you time your purchases around your billing cycle and pay your card in full each month, you could have just shy of 2 months interest free of all purchases, but if you carry a balance you typically start paying interest from day one of purchase. For this reason you always want one credit card that you can pay the balance off in full every month without fail. In your case, one option would be to get a third card which not many people would recommend. Another would be to get your first card down to a zero balance. Since you only have a $7500 balance on that one, the $4000 payment would be more than halfway, which is a good start. Paying this one down for this purpose is not exactly like the debt snowball method as it is strategic and not psychological.
A better strategy for you would be to transition from credit cards to a personal line of credit. Unlike credit cards, which are third party companies that partner with the banks, lines of credit are bank products and the interest rates, while higher than secured loans, are substantially lower than credit cards. Full disclosure, I used to work for RBC during university over 20 years ago, so I am more familiar with their products, but all the Canadian banks should have similar. An unsecured Royal Credit Line is about 6.5%. This difference from your CC rate would save you more than this $4000 every year and would make your debt growth more reasonable. The interest rate varies with the prime rate, but then so do the credit cards. Some other banks; TD 1, TD2, NBC, CIBC, Scotia, HSBC. Credit Unions probably have similar products as well.
These credit lines function somewhere between a loan and credit card. There is usually no grace period, either, so you would want to make purchases with your cards (one that does not carry a balance), which also typically offer other consumer protections, and then make payments with the credit lines when they are due. I would recommend talking to a personal banker at your bank about their products, what you qualify for, and a short, medium and long term goal for your circumstances.
posted by Yorrick at 11:40 AM on February 22, 2020 [1 favorite]
A large advantage that credit unions have over banks is their social focus. The entire point of a credit union is that a whole bunch of people have got together to help each other fix problems like the one you've got yourself into; and if you get a loan from a credit union, the interest you pay on that loan accrues to the benefit of other people in circumstances like yours, not to that of wealthy bank shareholders.
That social structure also gives credit unions a financial advantage.
Banks and credit unions both make their money from the difference between the interest they charge on loans and the outgoings they need to keep them in business. If I invest in a bank then the bank is obliged to pay me a return on that investment for as long as I remain its shareholder, and the rate of return on the amount I invested is going to be way way way higher than the rate I would get by depositing the same amount in one of the same bank's savings accounts. Shareholder equity is a really expensive source of funding for banks.
But credit unions are mutuals, so the only shareholders are the members themselves and members don't get paid dividends. That means that a credit union is always going to cost less to run than a bank that manages a comparable amount of capital. This lets credit unions offer their members a lower interest rate on loans and/or a higher interest rate on deposits than would be sustainable for a bank of similar size. The only reason banking companies can be sustainably competitive with mutuals while continuously haemorrhaging money to equity investors is that they are usually much bigger than credit unions and therefore benefit from economies of scale, as well as being at least as willing to screw over their staff as they are to screw over their customers.
Like any corporate, credit unions can merge; and if enough of them do that you will occasionally see the creation of a thing of beauty like Bank Australia. But even a fairly small credit union will typically be able to offer you a good deal on a personal loan as well as being much less unpleasant to deal with than a bank. Recommended.
posted by flabdablet at 7:46 PM on February 22, 2020
That social structure also gives credit unions a financial advantage.
Banks and credit unions both make their money from the difference between the interest they charge on loans and the outgoings they need to keep them in business. If I invest in a bank then the bank is obliged to pay me a return on that investment for as long as I remain its shareholder, and the rate of return on the amount I invested is going to be way way way higher than the rate I would get by depositing the same amount in one of the same bank's savings accounts. Shareholder equity is a really expensive source of funding for banks.
But credit unions are mutuals, so the only shareholders are the members themselves and members don't get paid dividends. That means that a credit union is always going to cost less to run than a bank that manages a comparable amount of capital. This lets credit unions offer their members a lower interest rate on loans and/or a higher interest rate on deposits than would be sustainable for a bank of similar size. The only reason banking companies can be sustainably competitive with mutuals while continuously haemorrhaging money to equity investors is that they are usually much bigger than credit unions and therefore benefit from economies of scale, as well as being at least as willing to screw over their staff as they are to screw over their customers.
Like any corporate, credit unions can merge; and if enough of them do that you will occasionally see the creation of a thing of beauty like Bank Australia. But even a fairly small credit union will typically be able to offer you a good deal on a personal loan as well as being much less unpleasant to deal with than a bank. Recommended.
posted by flabdablet at 7:46 PM on February 22, 2020
Look at books and blog of Gail Vaz Oxlade, Canadian personal finance guru. Through Twitter, she is running a MoneyMasterClass that you can join. She is the creator of Till Debt Do Us Part - on YouTube, originally on Spike TV.
posted by Enid Lareg at 7:47 PM on February 22, 2020
posted by Enid Lareg at 7:47 PM on February 22, 2020
More importantly, even when they are, they can be an extremely dangerous approach if you don’t have the income and discipline to pay them off before the regular (very high) rate kicks in.
OP is already paying interest rates of ~20%! I don't think it can legally get much higher. In any case, since the balance transfers I recommend still occur within OP's existing credit limits, there wouldn't be any temptation here the way a new line of credit would be.
posted by salvia at 1:18 AM on February 25, 2020
OP is already paying interest rates of ~20%! I don't think it can legally get much higher. In any case, since the balance transfers I recommend still occur within OP's existing credit limits, there wouldn't be any temptation here the way a new line of credit would be.
posted by salvia at 1:18 AM on February 25, 2020
This thread is closed to new comments.
The avalanche method involves paying off loans with the highest interest rate first. The snowball method involves paying off loans with the lowest balance first.
If you follow avalanche then you pay less interest and get out of debt sooner, all things being equal. But snowball pays off individual loans faster, which is motivating for a lot of people.
Take your pick. You can use Unbury.us to model what effect either strategy, in combination with this windfall and ongoing monthly payments, would have on this debt.
Your credit score is not relevant here as far as I understand it. It depends only on the ratio of total debt to total credit limit. It doesn't depend on whether both lines of credit are $2000 clear of their limit, or one line is $4000 clear.
And you didn't ask, but you should investigate options to refinance. Those are high rates of interest, especially if you're relying on windfalls to pay them off.
posted by caek at 8:44 PM on February 21, 2020 [12 favorites]