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Pay down credit cards or save money?
October 1, 2010 5:53 AM   Subscribe

My parents are loaning us $10,000. Should we save it or use it to pay down credit cards?

We have no savings and my husband's job is somewhat precarious. I am unemployed. We don't own anything of value. We have cut everything we can from our lives (cable, etc) and we can still only pay the minimums on our cards. We do not use the cards.

We have two cards with large balances and atrocious interest rates:
Mastercard $21000 at 24.99% and Discover at $7000 and 25.99%

I feel better having that money in the bank just in case he loses his job. Once I find a job we can pay down the cards. My parents are not charging us interest and will let us pay it off over 5 years. What should we do?
posted by fantoche to Work & Money (42 answers total) 6 users marked this as a favorite
 
Call those credit cards and see if you can get the interest rates lowered. Also see if you can get a different card with a lower rate and transfer those balances there. You need to stop the interest rate bleed.
posted by Busmick at 5:56 AM on October 1, 2010 [5 favorites]


Also I dont know the circumstances but is there anyway you can get a job? Even if its in a fast food place. That will give you extra money to pay more than the minimum. If that is possible then you might want to think about paying off that discover card and keeping $3k in savings.
posted by Busmick at 5:58 AM on October 1, 2010 [2 favorites]


You're paying over $7000 a year for the privilege of keeping that debt unpaid. That's a lot of money. If you can't get the interest rates lowered, I'd seriously look at paying some of that debt down. Just be aware that once you do that, you may have the available credit on those accounts lowered by the credit card companies, which means you won't be able to charge that money back up in an emergency.

It might also make sense to pay off some of the debt as Busmick suggested, while keeping a (smaller) nest egg for emergencies.
posted by This Guy at 6:06 AM on October 1, 2010 [1 favorite]


How is your credit and do you have any other cards that you could transfer to? I too would concentrate on finding lower interest rates on other cards, but be aware that most charge a 3% balance-transfer fee. Your current credit card company will most likely not lower anything; you might call Discover and try to tell them that you are going to transfer that 7k if they don't lower your interest rate substantially. Then you can keep the 10k chunk as security.
Also, you should go out and get any job you can TODAY.
posted by bunny hugger at 6:11 AM on October 1, 2010


Yeah, definitely pay off the Discover, keep the $3k in savings if you want, and then for the other card, make sure you pay the minimum PLUS the minimum you were paying on the Discover card (since you know you can afford that since you've been doing it already, you won't feel any richer or poorer, but you'll have one card paid off, and you'll be paying more than minimum which will help pay off the other one faster!)
posted by Grither at 6:12 AM on October 1, 2010 [26 favorites]


A lot of personal finance blogs espouse the idea of the "debt snowball", and it would certainly work here.

Take $7,000 out of the original 10 grand and pay off the Discover card completely. After that's complete, continue paying down the Mastercard on a monthly basis, but instead of pocketing the money you would have been using to pay off the Discover card, put it towards the Mastercard payment. Once that's paid off, then start paying back the loan to your parents.

For example, assume your minimum payments on the cards are $200 for the MC and $100 for the Discover, and (as it sounds from your question) your total monthly intake is equal to your expenditures. Paying off the Discover gives you $100 a month extra to play with. Now, every month pay $300 to MC instead of $200. After the MC is paid off, you'll have $300 per month surplus, and you can give that to your parents to pay off their loan.

The remaining $3,000 can be kept as a reserve for emergencies, or use it immediately to pay down the MC balance.
posted by backseatpilot at 6:17 AM on October 1, 2010 [50 favorites]


I would hang on to $3k as an emergency fund (for real emergencies only!) and use the rest of the money to completely pay off the Discover card.

On preview - backseatpilot has it exactly right. Absolutely that.
posted by stoneweaver at 6:26 AM on October 1, 2010


There's pretty much no form of savings that offers 25% interest, so it would be a loss if you tried saving the entire amount. A lot of the advice above sounds good: pay off most of the credit, and save a small amount.
posted by jasonhong at 6:26 AM on October 1, 2010 [2 favorites]


Do exactly what backseatpilot says.
posted by DarlingBri at 6:37 AM on October 1, 2010


Pay of the Discover and pocket the $3k as a liquidity reserve, as discussed above, but definitely, absolutely, look into balance transfers. A lot of cards offer a 0% teaser rate, and though there's still a 3-5% fee imposed, that's a hell of a lot better than the 20%+ you're paying now. The catch, aside from the fee, is that if you don't pay it back in a year, they retroactively impose all the interest on the amount you haven't paid off. So paying it off within the year is key.

What you do is you take what you were paying on your Discover card, multiply by 12, and transfer that amount to a 0% card, then pay it off in a year. Then keep doing that until the whole thing is gone.
posted by valkyryn at 6:39 AM on October 1, 2010 [1 favorite]


backseatpilot FTW
posted by Bango Skank at 6:41 AM on October 1, 2010


I understand how painful the prospect might be, but consider getting any sort of hourly job as a stopgap to help you get rid of those CC balances. I had to do exactly this (many years ago) to get out from under student loan and CC debt, and it sucked delivering pizzas (working nights and weekends in addition to my regular job), but when the debt really started to go away the quality of my life (much less anxiety, more money to live on) was dramatic.

Also, yes, Backseatpilot's cumulative debt payoff is the CLASSIC way to most efficiently get rid of substantial debt and you should seriously consider taking that advice.
posted by aught at 6:54 AM on October 1, 2010


valkyryn: "What you do is you take what you were paying on your Discover card, multiply by 12, and transfer that amount to a 0% card, then pay it off in a year. Then keep doing that until the whole thing is gone."

Would opening this many credit cards in a relatively short period of time (and then subsequently closing them, if I'm understanding correctly) have an adverse effect on your credit rating? Otherwise, I love this idea...
posted by This Guy at 6:54 AM on October 1, 2010


Don't get the loan from your parents yet. Call the card companies and negotiate down tht debt - if your finances are such you can only pay the minumums the banks will know that, and be willing to deal because they know longer term you would have to file and the debt would be worthless. Yes it will kill your credit rating but realistically it does sound like it is that good to being with given the rates you are paying, and its not like you can afford to buy a house now anyway. Once they come back at you with the lower debt levels take the loan from your parents and do a version of what backseatpilot is telling you to do.

Don't just ask for lower rates, as for principal written down. If they don't listen then call a lawyer and file for bankruptcy - it exists for people like you and shouldn't be something to be afraid of.
posted by JPD at 6:55 AM on October 1, 2010


Honestly, I'd probably try to save most of that money, at least until your husband's job situation resolves and/or you get a job yourself. If you can save enough that, even with the credit card payments, you can get by for a few months while looking for work - that's a very valuable thing.
posted by Mr. Excellent at 6:59 AM on October 1, 2010


I am with everyone else who thinks that paying off the Discover card immediately is a good idea. If they keep your card open once it is paid off, there is a possibility that they will eventually send you balance transfer offers.

I would like to give further advice, though. Based on my experience with personal loans, I would suggest that you start paying off the loan from your parents immediately. Take a small notebook and start keeping track of the payments. Even if you can only send them $10 or $20 a month at first, it establishes a track record and keeps it up front. They have done you a huge favor with this loan and being up front about the state of your finances and making a small payment as acknowledment would probably be much appreciated.

As far as putting the other $3,000 in savings, keep in mind that having $3,000 more on the Mastercard is costing you $774 in extra interest for just the first year. The total cost of that $3,000 will vary depending on how quickly you pay off the total debt, but it could end up costing you $6,000 or more in interest before it is all paid off. You might consider holding the $3,000 back but paying it out to the Mastercard over the next several months depending on how the situation looks.

If the situation with your husband's job is really that precarious, I would suggest considering living as if your husband is already laid off. Go through your last 3 or 4 months of bank statements and take a hard look at everything. Downgrade or cut your cable bill, cell phone bills, look into moving somewhere cheaper (particularly if you are renting), all those things that most people don't really do until they are knee deep in it.
posted by jefeweiss at 7:01 AM on October 1, 2010


Set aside enough cash to cover a month's expenses. Then put the rest on the cards, the interest on that amount is crippling.
posted by L'Estrange Fruit at 7:10 AM on October 1, 2010


As far as putting the other $3,000 in savings, keep in mind that having $3,000 more on the Mastercard is costing you $774 in extra interest for just the first year.

True, but the cost of a liquidity crisis can be significantly higher than that. Ironically enough, it is very, very expensive to be poor.

The best prices at the supermarket generally involve buying more at once, which is great if you have enough cash on hand to pay $100 today and only $40 next week, but out of reach if you've only got $50 to spend today. Bouncing a check can cost you $50 a hit, not to mention screwing up your transactions with creditors and merchants. Not being able to pay your rent can get you evicted. Not being able to pay your utilities can get your power and heat shut off, and that's No Good At All. Not being able to pay to have your vehicle repaired means you're stranded unless you have access to credit. Not being able to make your car payment can get your vehicle repossessed, and now you can't get to work, so you lose your job, and...

So yes, while putting some money aside instead of throwing it all at your debt may not be the optimal way of managing interest, it is a perfectly reasonable way of handling one's budget.

Would opening this many credit cards in a relatively short period of time (and then subsequently closing them, if I'm understanding correctly) have an adverse effect on your credit rating?

First, don't close them. As long as there isn't an annual fee, having more credit cards open actually helps your credit rating by lowering the total amount of available credit that you're using.

Second, we're only talking about a card a year, so the effect will be small.

Third, even if it does produce a hit on your credit score, that's only a problem if it stops you from taking out more 0% advances or you were planning on getting a mortgage in the next few months.
posted by valkyryn at 7:21 AM on October 1, 2010 [1 favorite]


You should also consider using some of the savings to create a 'buffer' that will allow you to budget more effectively.

Say you have $2k of income per month. Right now, you're probably budgeting all of that as soon as you get it and living paycheck to paycheck. If you use some of this capital as a buffer, it would work like this.


Month 1 > You deposit $2k into your empty checking account.
Month 1 > You budget that money to cover your normal monthly expenses
Month 1 > You get paid $2k - you let that money sit and budget it to cover Month 2.

Month 2 > You use your pay from Month 1 to cover your normal monthly expenses
Month 2 > You get paid $2k - you let the money sit and budget it to cover Month 3...

And so on.

I highly recommend a budgeting program called You Need a Budget which has this idea as one of its 'Four Rules'. Basically I'd be in seriously deep financial shit without this program - it's helped me pay of thousands in debt and sustain two people on one income in a way I wouldn't have thought possible a few years ago.
posted by Happy Dave at 7:24 AM on October 1, 2010 [4 favorites]


I'm not sure if those suggesting putting the balances on lower-interest credit cards realize that it's nearly impossible for a person with the kind of credit this couple probably has (given their debt, and the fact that their current cards are high-interest) to get a new credit card anymore, let alone one with better interest or a 0% interest period. Credit card companies are finally wising up (because they have to) and not extending credit to people who haven't been shown to pay it off well.
posted by elpea at 7:33 AM on October 1, 2010


We have already agreed to pay my parents back a monthly amount so the debt snowball won't work as it's not giving us any more money per month to put towards the Mastercard. It would still take years to pay off the Mastercard even with the extra $180 minimum from the Discover card. Our parents are very generous but not enough to wait a few years to start getting paid back.

There is no way I can get lower-interest credit cards. Our credit scores are trashed.

I have been looking for a job. Fast food etc won't hire me because I am way overqualified and there are plenty of other people here who will take the minimum wage jobs. As it says in the question we have already cut expenses as much as we can. I suppose we could eat ramen for every meal. I really don't see what else we could cut. We have the minimum cell phone plan and no landline. I have sold my jewelry and my car. Our computers are 5 years old. We don't have a TV. We might be able to save $100/mo in rent but then my husband would use almost all of that up in gas commuting to work. I am not asking for sympathy here but just trying to give a better picture of the situation.

Not being able to pay your rent can get you evicted. Not being able to pay your utilities can get your power and heat shut off, and that's No Good At All. Not being able to pay to have your vehicle repaired means you're stranded unless you have access to credit. Not being able to make your car payment can get your vehicle repossessed, and now you can't get to work, so you lose your job, and...

This is absolutely correct and this is why we lean towards saving the money until I find work, but I wanted to see if there was something I was missing. It sounds like the people who are in favor of paying off the cards are missing information (my fault) or misunderstanding parts of the question.
posted by fantoche at 7:48 AM on October 1, 2010


Fantoche, have you considered bankruptcy?
posted by lydhre at 7:55 AM on October 1, 2010 [2 favorites]


Agree with lydhre. Check into it. Since you have no assets your debt would likely go away completely (no payback plan).
posted by Wordwoman at 7:59 AM on October 1, 2010


We have already agreed to pay my parents back a monthly amount so the debt snowball won't work as it's not giving us any more money per month to put towards the Mastercard. It would still take years to pay off the Mastercard even with the extra $180 minimum from the Discover card.

Unless I am missing something, the snowball will still work. Paying off the Discover will liberate $180 every month. That $180 can be used for the payments on the debt to the parents or to add to the MC payment. Either way, you are coming out ahead, and can still have $3000 in reserve for an emergency.

All that said, though, and you are probably aware of this, the key has to be finding a way to finance your life that does not involve debt, whether to the credit card companies or to the family. It's a tough situation, but a lot of us have been there and the good news is that things will get better if you can start improving the situation.
posted by Forktine at 8:01 AM on October 1, 2010


The classic answer is backseatpilot, but it's up to you to decide if you feel financially stable enough to pay down the credit cards. Me, I get why you should pay off the credit cards and keep maybe 3k in savings, but I would be tempted to save the money instead. It is a very, very tough choice.

I would look at bankruptcy, if it is at all an option for you, before taking a loan from your parents rather than after taking that money.
posted by mrs. taters at 8:11 AM on October 1, 2010


Not the high road, but I had a couple credit cards get away from me and I just decided having bad credit would have to be ok for awhile. I quit paying them and after 6 months they were ready to negotiate. I settled the $24k citibank for $6500 and mba's $21k for $7500.

Put the $10k in the bank, quit paying and instead save up more money, as cash will be king for awhile. when they come back to negotiate, use that savings to pay it off.

You (and I was) probably are "bankrupt" even though you haven't filed it.
posted by thilmony at 8:11 AM on October 1, 2010


Fast food etc won't hire me because I am way overqualified and there are plenty of other people here who will take the minimum wage jobs.

If you're not opposed to getting a minimum-wage job for reasons besides being overqualified, don't list all your qualifications. Don't lie, just don't put your degree/experience/etc. on your application. Tell employers that you're returning to the workforce because of your husband's employment situation; some will probe deeper but some will assume that you're an unqualified housewife and move on to the next question (assuming you're female). Don't dress up like you'd dress up for a professional interview: go for business-casual and avoid wearing higher-end brands. You don't want to tell any overt lies, but you don't want to set off any socioeconomic-indicator alarm bells that might lead the hiring manager to suspect sneakiness on your part. Be good at being sneaky. (I worked minimum-wage and low-wage jobs in college, due to not getting a work-study award (despite needing one) and therefore being ineligible for a lot of the on-campus jobs. Whenever I listed my student status, I would never get called in for an interview. When I didn't list my student status on my application, I would get called in for an interview about half the time. I would wear a pair of khakis and a polo shirt I got at the local Target, and I would usually get hired. The only problem that I regularly experienced was people scheduling me outside my availability, which would occasionally lead to me losing a job.)

It is expensive to be poor, and it really sucks. I hope things turn a corner for you soon.
posted by kataclysm at 8:12 AM on October 1, 2010 [3 favorites]


Fast food etc won't hire me because I am way overqualified and there are plenty of other people here who will take the minimum wage jobs.

When you're applying for a crap job you're only planning on holding long enough to make progress on paying off debt, you don't give them a complete resume, just your high school graduation and any other filler jobs you might have had. (Just as you wouldn't put a McDonald's job on an application for a professional position.)
posted by aught at 8:15 AM on October 1, 2010


There is no way I can get lower-interest credit cards. Our credit scores are trashed.


This seals it for me - you need to either negotiate or file for bankruptcy. You can probably avoid the hassle of bankruptcy - price out what it'll cost you and basically ask for your debt to be renegotiated to that new level.

This is why bankruptcy exists as option. People make mistakes.

(And there is no high road or low road - money isn't sentient, to the banks you are a number)

And I say this as someone who has a material amount of his wealth invested in the companies I am telling you not to repay. They knew you were a risk - that's why they charged you so much for the credit.
posted by JPD at 8:17 AM on October 1, 2010 [1 favorite]


There is no way I can get lower-interest credit cards. Our credit scores are trashed.

While this may be true, it does NOT mean that your current card rates can't be negotiated down. Seriously, just call and bargain with them, it cannot hurt you to try.
posted by tristeza at 8:27 AM on October 1, 2010


I came back to see if people were ripping me for my recommendation. You would be surprised how the credit card companies treat you when you call back and take their calls even when you're not paying them.

I consistently told them I was broke, and can only afford to settle for a portion of what I owe. They would say no at first, etc, then we'd have nothing else to talk about since I told them I can't afford to pay even a $1.

Now, sure you have $10k in the bank, but you can't AFFORD to use it to pay them today so it's true.

But every time they called, I discussed it. Every time they left a message, I called back.
posted by thilmony at 8:50 AM on October 1, 2010


after you've paid off the discovercard, wait a month, and then call them to see if they will give you a promotional balance transfer rate of 1% or hopefully 0%. then transfer the max you can from the mastercard to discover and the new low interest rate on the discover card.
posted by jrishel at 9:16 AM on October 1, 2010


Now, every month pay $300 to MC instead of $200. After the MC is paid off, you'll have $300 per month surplus, and you can give that to your parents to pay off their loan

This piece of advice received > 30 favourites, 5 commendations and 1 FTW? WTF! $300 a month wouldn't even pay the interest!

You are clearly in desperate straits - my sympathies. Maybe bankruptcy is the way to go, but first get some advice from a professional, hopefully offered pro bono.
posted by Neiltupper at 10:38 AM on October 1, 2010


The catch, aside from the fee, is that if you don't pay it back in a year, they retroactively impose all the interest on the amount you haven't paid off.

This is not true on any balance transfer offer I've ever seen. (It is common on promotional APRs for store credit cards, however. We bought some appliances for our new house on one of those deals -- if we don't pay it off within a year, we owe 29% interest on the whole thing for the whole year.)
posted by kindall at 10:39 AM on October 1, 2010


Keep in mind that if you don't pay off any of the credit card balance and just keep the $10k in reserve, your monthly budget will get even worse -- each month, you'll have the same expenses as earlier plus paying the loan back to your parents. Of course, you can take it out of your 'savings' of the loaned money ... but that's somewhat circular. If you pay off some debt, at least your monthly expenses will go down a little.
posted by bsdfish at 11:36 AM on October 1, 2010


Keep in mind that if you don't pay off any of the credit card balance and just keep the $10k in reserve, your monthly budget will get even worse -- each month, you'll have the same expenses as earlier plus paying the loan back to your parents. Of course, you can take it out of your 'savings' of the loaned money ... but that's somewhat circular. If you pay off some debt, at least your monthly expenses will go down a little.

That's a good point. If you plan to keep the whole thing in reserve you are better off not taking the loan unless/until you need it (in case of layoff or other emergency expenses). Then at least you aren't adding to your monthly bill payments.

I personally agree with the plan of paying off the $7K card, keeping the $3K in reserve, and putting more toward the $21K card. Before making any payoff, though, investigate your bankruptcy options.
posted by JenMarie at 11:45 AM on October 1, 2010 [1 favorite]


This piece of advice received > 30 favourites, 5 commendations and 1 FTW? WTF! $300 a month wouldn't even pay the interest!

Those were example numbers. Paying off the Discover card frees up something like $150 a month (rough estimate). Using some guesses and a credit card calculator, the MasterCard can be paid off in 60 months (5 years) at payments of roughly $725 per month. I have no idea what kind of minimums the OP is currently paying (guessing 3% or $10, whichever is greater?), but at 21,000 the MasterCard will never be paid off at minimum payments. The snowballing effect of paying off the Discover and splitting the freed up money between the MC and her parents may put her in a better position to work on a 60-month payoff plan for the 21,000. If 5 years makes the payments too high, adjust. 10 years works out to a bit under $600 per month.

I would definitely only keep a portion in reserve, though. bsdfish is absolutely right that not paying off any of your debts is only putting you in a worse situation than you already are... you may have liquid cash of 10,000 but now you have another debt.
posted by asciident at 11:47 AM on October 1, 2010


Just one to clear something up:

This piece of advice received > 30 favourites, 5 commendations and 1 FTW? WTF! $300 a month wouldn't even pay the interest!
posted by Neiltupper at 1:38 PM on October 1


Didn't you read this part (bold added)?

For example, assume your minimum payments on the cards are $200 for the MC and $100 for the Discover
posted by backseatpilot at 9:17 AM on October 1


The point of the comment wasn't the specific numbers. backseatpilot could have said 'assume your minimum payments on the cards are $x for the MC and $y for the Discover" except he or she chose not to, probably because people like examples.
posted by Green With You at 11:54 AM on October 1, 2010


Here are some expenses that you may still be able to cut:

Is it possible for your husband to sell his car and bike commute (or use public transportation)? I don't know how many countless thousands of dollars I have saved over the years by biking instead of driving.

Do you need Internet access at home? It's available for free at the public library.

Depending on where in the U.S. you live, it may be cheaper to have a landline than a cell phone. I live in California, where low-income households only have to pay $7/month for a landline.
posted by aniola at 2:41 PM on October 1, 2010


Go to the bank where you have the longest relationship (maybe your parents' bank), and ask for help managing a debt. Sit down, be friendly and low-key, explain what happened to create the debt and why you've learned your lesson, and see what they can do for you. One of my friends did this and despite his horrible credit, the bank consolidated his debts onto a brand-new line of credit with a much lower interest rate. Asking nicely at the bank might help; it probably won't hurt.
posted by pseudostrabismus at 7:42 PM on October 1, 2010 [1 favorite]


I can't vouch for them but you can try to get enough money to pay off the cards on Prosper.com and get a lower interest rate through them.
posted by IndigoRain at 9:09 PM on October 1, 2010


Call the bank and try to get your interest rates lowered. If they won't do it, call a program like CCCS. Yes, it will show up on your credit, but it did wonders for my interest rates.

I think debt snowball is kind of BS because it has you focus on the lowest balance first, but your interest rates (right now) are almost the same so it doesn't matter. If you can get the one card paid off in full (by using the money from your folks) you should then have enough to pay the other one off via the CCCS payment plan.

I paid somewhere between $30 and 35k of CC debt via CCCS and would recommend it to anyone.
posted by getawaysticks at 2:13 PM on October 5, 2010


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