Help me pay off my credit cards.

July 27, 2008 7:08 PM

I have: fair credit ( reported between 650 - 720 ). a student loan and an auto finance loan of no more than $30,000 in combination. ~$9000 in credit card debt spread between 2 cards. What is a good way to pay off my high interest credit cards? I am looking at options like small loans, debt consolidation, possibly even balance transfer to a new card (although I hear that hurts your credit score?). Any good sites that can help me budget or somehow help me get out of paying like $150+ in finance charges every month?
posted by judge.mentok.the.mindtaker to work & money (16 comments total)

I'd love to hear any advice on this.
posted by Oktober at 7:14 PM on July 27

You may not need loans or anything like that--are you asking because you really have no money to pay the cards off, or . . . ? $9,000 in debt isn't too too awful.

Pay the card with the smaller balance first. Some sources recommend paying the minimum balance (say, $50) on the card with the larger balance while you pay as much as you can afford to on the smaller card (say, $200), breaking it into 2 payments a month (because sometimes it's easier to pay off more a month if you break it up). Then, once you're done with that card, take the entire amount you've been paying ($250) and use it to pay the other card off every month, also in 2 payments. Did that make sense?
posted by liketitanic at 7:20 PM on July 27

I have had very good luck with Debt Reduction Services, a firm operating mainly out of the northwest (plus New York and Oklahoma, go figure.) You go sit for an hour appointment with them, you give them a rundown of your current budget and what you owe on your cards and they set up a payment plan. You pay them a $25 set-up fee and $10 a month per credit card, what you get in return is a greatly reduced interest rate (anywhere between 0 and 14 percent, depending on the credit card company) plus you simply make a payment to the company and they dispurse your money to your various creditors. There is no penalty for paying off accounts early, either. HOWEVER, as part of the deal with your creditors you are supposed to agree to close all your other lines of credit and not apply for any new ones until you're done with the program. (I opted to keep my Amex Cards while doing this program with my B of A visas and no one seems to care, but technically they are supposed to require them to be closed.)

There's a lot of companies like this and I'm sure many of them are just fine. Four things to keep in mind if you want to do this, though: 1) How much is the set-up fee? 2) How much is the monthly account maintenance? 3) How low can they haggle your interest rate for you? 4) Can you live without credit cards while you do this?
posted by Happydaz at 7:22 PM on July 27 [1 favorite]

Are the finance charges for late payment? Are you paying late because you don't have cash in hand? Is that because you have no cash, really, or because of budgeting?
posted by liketitanic at 7:22 PM on July 27

Poor budgeting. Also the $150 is just the interest. About $100 / month on the higher rate card, and about $50 a month on the lower rate card.

When it comes down to it I have a little under $900 a month to spend on paying my debt down, but somehow my balances just don't really go down.
posted by judge.mentok.the.mindtaker at 7:27 PM on July 27

Actually, from my understanding, the only hit to your credit from opening a new card (assuming it's a bank issued card and not something from a store) would be the initial credit check that they do. I think it really only matters if you start having many credit cards (I bet 4+) that you'd really see a bad hit. Plus, the largest part of your credit score is based upon the total used credit to the total available credit. If you get another credit card, this ratio should lower and your credit score might even improve. If you can find a credit card that has 0% interest balance transfers for a year and can pay your cards off in that time (or find another one at 0%), I think that's the way to go.

As far as websites for budgeting and money management. I used to use pear budget's excel spreadsheet for budgetting, although now they have an online version for $3 a month. Also, I use a free service, Mint, to track my spending and to automatically create my budget for me. The best method to use for budgetting is to just keep track of what you're spending each month on different things, and then put that into a budget form. Then if you notice that you're spending $400 a month on eating out, you can try to stop.
posted by ets960 at 7:27 PM on July 27 [2 favorites]

Okay--then first you can do, for free and by yourself, what any consolidator would ask you to do: budget more carefully.

I do think using that $850 a month more carefully and paying on time--if you haven't been--should help. I'd also see if you can get a lower interest rate on either card, if you haven't already.

Tackling the smaller debt first really should work. Think of it this way:

Say you have 2 debts, one $6,000 (debt A) and one $3,000 (debt B). If you threw $600 of your debt payment budget at the SMALLER one, you'd have it paid in about 7 months. You'd be paying close to the minimum ($250) on the larger debt, so it would be about $5,000 but at the end of that 7 months you'd be able to devote $850 a month to it, and you'd have paid it off in another 6 months. (And yes, I allowed for accumulating more interest in those calculations.)
posted by liketitanic at 7:37 PM on July 27

GetRichSlowly.org is chock full of helpful tips.

Some people say pay off the high interest cards first, others argue that it's psychologically beneficial to pay off the smaller balance first to feel like you're making headway.

My favorite tip (although I've seen it in other places) and one that I've taken into practice? The $5 savings rule... it can make you cringe, but every time I get change from a purchase that includes a $5 bill, that bill goes into my savings spot - a basket on top of our buffet. It hurts to put it in there, but for me once it's in there it's out of site and out of mind. Every six months I empty it out and use it to put towards some debt. Last time I emptied it?? $1000 dollars.
posted by matty at 7:41 PM on July 27 [1 favorite]

These are all really great ideas. I am a budgeting moron, and this is making it clear I could be easily doing way better. I am already getting totally blown away by mint.com. I think the $5 basket might be next.
posted by judge.mentok.the.mindtaker at 7:47 PM on July 27

If the numbers you're citing are correct you are paying like 20% interest. You definitely should be able to cut that considerably with a balance transfer. Although they do not seem to be giving away the 2 and 3% fixed rates like they were 6 or 7 years ago, I get many offers for 5-7%, fixed rate transfer offers. I do own a house but I was getting those offers before that.

Requesting too many new lines of credit will negatively affect your credit rating but transferring your balances will not and paying them down faster will definitely improve your score. Up to a point having more available credit should improve your score.

Shop around. Read the small print - almost all transfers have a one-time transfer fee, which can basically be like another year's interest up front, so you have to do the math, think about how you're going to pay these off and figure out if you're still coming out ahead. You can also call your current creditors and see if they'll bargain your rates - you've got a better chance if you've got a transfer deal in hand and are ready to close out your debt with them.
posted by nanojath at 8:05 PM on July 27

I don't think getting a loan to consolidate your debt is a good idea. It's not really the interest rate that's killing you, it's the debt, and moving it around doesn't address the source of the problem. It could even make things worse: if you move all your debt onto one card or one loan, suddenly you'll have all those other lines of credit open to you, which will make it super-easy to go even further into debt when things get tight.

Budgeting is definitely the way to go. Dave Ramsey's kind of a religious zealot when it comes to debt, but I have trouble arguing with his methods.

I'm doing a modified envelope method. My paychecks go into an ING checking account, which feeds into several ING savings accounts that act as virtual envelopes for the various areas of my budget. It sounds complicated, but it's made my financial life pretty low-maintenance.

For spending money (food, gas, misc), I move a certain amount to a Charles Schwab checking account (reimbursed ATM fees!). Then I take out my entire food budget in cash and put it in a special place in my wallet.

This system keeps me from over-spending, because the only account I have access to when I'm out and about is the Schwab checking account. And once that's gone, it's gone, but my bills all get paid.
posted by sportbucket at 8:07 PM on July 27 [2 favorites]

I'd like to suggest working a second job, or work overtime if possible.

It keeps you from going out and spending more money, and I think it really puts you in the midset to try and get the debt paid off as quick as possible. I'm my mind, you need more money coming in, money that will go directly into paying these bills off.

I've also heard of people selling off their valuables on ebay, and having yardsales, but you aren't going to get much for your used stuff.
posted by wrnealis at 6:50 AM on July 28

I too can highly recommend the envelope system for budgeting. A second or third job is also another great way to tackle debt vs. consolidation. You'd be surprised how quickly you can pay things off when you set a hard goal to do so. I also recommend paying the smallest debt off completely before any of the others to gain some momentum. Some people call this the debt snowball and has been popularized by Dave Ramsey. Good luck in paying off your debt and getting on a budget.
posted by HappyHippo at 7:05 AM on July 28

I'm busy taking notes myself on the same issue; I don't have the car debt, but I have exactly that much credit card debt and have been just barely chipping away at it. (I use my debit card for any purchases instead now, so I almost never actually use the physical cards.)

Mint.com looks like a very attractive option.
posted by EmpressCallipygos at 1:17 PM on July 28

thanks, everyone.
posted by judge.mentok.the.mindtaker at 2:16 PM on July 28

After reading a few books on debt reduction and being honest with myself about my financial situation, I worked in a coffee shop this past year to make ends meet while teaching. After securing a fulltime teaching position, I was able to quit the coffee job and enjoy more free time. The debt snowball technique worked really well for me. I also keep my credit cards away from my wallet, except for when I travel, &c.

When you reach the point where you can see your bills going down each month (barring scary car/housing expenses that can crop up), life gets a lot more enjoyable.

As an aside, after spending 20 hours a week working evenings in a coffee shop, I feel like a king when I come home from teaching at 4PM and have the entire night to spend with family and friends instead of 30 minutes to shower, eat and change into coffee shop mode until midnight, then sleep until 6 AM starting all over.
posted by vkxmai at 11:51 AM on July 31