And after all this, I'm freezing the cards in a huge block of ice.
February 24, 2010 4:37 PM   Subscribe

Are there penalties to paying off all my credit card debt all at once?

I managed to rack up a fearfully large credit card bill ($9,000). (I'm aware that others have racked up a larger sum, but I used to be the textbook example of a "smart" credit card user. This is all rather frightening and new to me). Through good luck (and a loving family member), I've recently received a very very large check. Considering that the interest fee this month for one of my cards (just one! out of four!) was about $92, I'm looking to get rid of this debt once and for all. The Large Check I've received is more than enough to pay off my debt.

I'm wondering if there are any penalties for doing it all at once, though? I've recently read that credit card companies are now monitoring not only how we're paying off our debts but also how we're using the cards (when and what we're paying for and if it's different from our habits in the past). I'd hate for the credit card companies to shut my accounts because I'm no longer a profitable customer to them. Furthermore, I actually have a very good credit score (I was a responsible user until this past year), and I'd really like to keep it that way. Would it be smarter to pay it off in large thousand-dollar chunks?

Even after the annoying credit card debt, I'll still have a little bit of money left from the check. Should I build a nest egg or pay off my student loans more quickly?

tl;dr
- Penalties to paying off $9,000 credit card debt all at once?
- Nest egg v. student loans?
posted by prancingllama to Work & Money (16 answers total) 4 users marked this as a favorite
 
the benefits of paying off your credit card as soon as possible far outweigh any of the possible (and very unlikely) negative effects. credit card debt is bad debt, and it's high interest debt. get rid of it. you'll also be affecting your ratio of available credit to used credit in a way that can only help your credit rating.

as far as student loan debt, this is generally pretty low interest debt, and i wouldn't be overly concerned with getting rid of it right away. maybe you could run the numbers and see if interest you could earn in, say, a low-risk investment like a CD would outpace the cost of your interest payments on the loan and decide that way.
posted by TrialByMedia at 4:46 PM on February 24, 2010 [1 favorite]


- Absolutely pay the credit card debt now.

- You should have a small emergency fund, equal to a few months expenses. Once you have that socked away, then start diverting cash to your student loans.
posted by chrisamiller at 4:46 PM on February 24, 2010 [2 favorites]


the benefits of paying off your credit card as soon as possible far outweigh any of the possible (and very unlikely) negative effects

This is true, but in light of the financial crisis, don't be surprised to have your credit limit reduced, or even have the account closed. I had fairly good credit up until last year, when credit card companies start reducing my credit limits for no reason (well, because of the Crisis, but not because of anything I'd done). One credit limit went from $10,000 to $800, just because they felt like it. Other accounts which I hadn't used for a while just closed the account down. Still others would "chase" the balance I was carrying- when I would pay down some, they would reduce the credit limit down to a few hundred over the new balance.

You are probably better off paying it off no matter what, but be advised this stuff *is* definitely happening to a lot of people. You might consider paying it all off but a few hundred bucks, or continuing to buy a few things a month with it. They'll be more likely to keep the account open that way, if that's important to you.
posted by drjimmy11 at 4:55 PM on February 24, 2010 [1 favorite]


There are plenty of people who pay off their credit cards every month and continue to have them. Pay 'em off. Close any that are charging you an annual fee.

In a few months you will probably start getting offers for new credit since other banks will notice that you paid off $9,000 all at once. Be careful about accepting any of these offers since you have already demonstrated a propensity to get in over your head. (I once owed $13,000, had it paid off by an employer, then ran up $50,000. Don't be me -- learn your lesson the easy way instead of the hard way.) However, you might consider replacing your existing card with one that offers better terms: warranty extension, cashback, whatever.
posted by kindall at 4:56 PM on February 24, 2010


Penalties? Hell no, they want their money. In fact, I bet that when you pay them off, they'll all increase your credit limit.

What can turn into a problem is when you have a lot of cards with zero balance, as they represent open risk -- in theory, you could easily just get yourself right back into trouble and then be unable, for example, to make a car payment, so it might be tougher to get a car loan.

Here's your plan for success:

1) Pay off all the cards.
2) Call all of your credit card companies and ask for them to expand your credit limit and lower your interest rate. Tell them you just got a new job and are planning to do lots of traveling in the future. Also tell them point blank that you will cancel your account if they don't lower your rates and increase your limits.
3) Determine who the 1 or 2 "winners" are and cancel the others.
posted by Cool Papa Bell at 4:59 PM on February 24, 2010 [4 favorites]


We pay ours off every month and have a credit rating of a pure and blinding hue. I think lots of use and monthly payoffs is one of the best things you can do.
posted by Kafkaesque at 5:00 PM on February 24, 2010 [3 favorites]


Pay it all now, it's so much worse if you let it fester.
posted by The Whelk at 5:20 PM on February 24, 2010 [2 favorites]


- Nest egg v. student loans?

Nest egg. Friend of mine got a nice new job he liked, paid off all his debt, and... got laid off. Had no emergency fund, had to scramble and now works in a job he hates. Having security (and options!) in a situation like that is more important than paying back your student loans a little faster.
posted by rkent at 5:39 PM on February 24, 2010 [2 favorites]


There aren't any penalties for paying down your debt. However, some cards do have penalties for not using them. The vast majority don't, though.

The student loans thing depends on the interest. If you can make better interest on your investments then your student loans, you should do that.
posted by delmoi at 6:02 PM on February 24, 2010


Pay them off. Seriously.

If you have student loans that have high interest rates try to refinance them... now that the rate is so low I bet you will have no problem. My variable rate loans were about 8% when i started paying them off, they have dropped to 4.5% due to the fed dropping the prime rate.

My federal loans are locked in at 2% or so...

I figure with 2% or even 3-4% loans I am better off investing the money than paying the loans off quickly. At the worst case I will lose a little money in interest, at best I will make some money on good investments.

If you have crazy high interest rate student loans get rid of them for sure.
posted by outsider at 6:11 PM on February 24, 2010


"Here's your plan for success:

1) Pay off all the cards.
2) Call all of your credit card companies and ask for them to expand your credit limit and lower your interest rate. Tell them you just got a new job and are planning to do lots of traveling in the future. Also tell them point blank that you will cancel your account if they don't lower your rates and increase your limits.
3) Determine who the 1 or 2 "winners" are and cancel the others."



I think the plan for success is:
1) Pay off your entire balance every month. Never leave any debts month to month on your credit card.
2) If 1 above is not achievable cut up your credit card and pay off the debt before it gets out of control.

Having a higher limit and lower interest rate will just encourage the OP to spend more money and leave it on his card (hey low interest rate!) and he will be right back in the same position, probably with no big check to bail him out.
posted by outsider at 6:15 PM on February 24, 2010


The one argument against paying it off all at once is if that doesn't leave you with some small reserve in case something comes up, but since you'll have that, I'd go for it.

I'd hold off on hitting the student debt hard (unless the interest rate is high). Put your remaining money some place that isn't easy to get to, like in a CD, so that it's not a constant temptation. If you want to feel that you're knocking down your student loans, throw the money you would have been paying on your credit cards at those instead. That way, you'll be getting out from under all of your debt, but have an emergency fund to fall back on in lieu of running up more credit card debt.
posted by Kid Charlemagne at 7:07 PM on February 24, 2010


- Penalties to paying off $9,000 credit card debt all at once?

None. Do it.

Credit card companies like people who pay, and keeping an unused card open on their books costs them absolutely nothing.

I just bought a house after years of keeping only two credit cards, one of which was never used and the other of which was paid off monthly. The blemish knocking my credit score down? Not enough credit cards. They wanted four.
posted by Tell Me No Lies at 7:35 PM on February 24, 2010


The one argument against paying it off all at once is if that doesn't leave you with some small reserve in case something comes up, but since you'll have that, I'd go for it.

Well right, but he would have the credit card.
posted by delmoi at 7:45 PM on February 24, 2010 [1 favorite]


1. Pay off all your credit card debt
2. Form an "emergency fund" of around 6 months expenses
3. Can you get an investment that will pay a greater interest rate than your student loans?
3a. As long as the answer is "YES" you should invest your extra money
3b. As long as the answer is "NO" you should pay down your student loans

Finally, call your credit card company (or companies) and ask them to raise the limit on your credit cards. Then, if you have more than one credit card from any particular issuer (Citi, Chase, CapitalOne, etc) ask them to consolidate your credit limit into the card you have had open the longest.

E.G. if you have a Chase Freedom card you opened in 2004 with a $5,000 limit and a Chase Saphire card you opened in 2009 with a $10,000 limit, ask (nay, demand) to have the $15,000 total credit you have from Chase consolidated into your Freedom card, and to have your Saphire card closed. This will have the effect of keeping your credit limit as high as possible while also keeping your "average account age" as high as possible. Most, but not all, companies will be amenable to this.

Now, charge a small amount on each card every month and PAY IT OFF EVERY MONTH. This will keep your accounts active and fee-free.
posted by jckll at 7:01 AM on February 25, 2010


Even Suze Orman, the financial guru who used to be the QUEEN of Pay It Down THEN Save a Fund, reversed herself. Basically, the Credit CARD Act has made credit card companies rather trigger-happy in shutting down accounts if you're not the Very Major Model of a Money-Making Profitable Credit Card User ... so credit cards are no longer a good alternative for a holdover/temporary "emergency fund" until one's saved enough. So, Orman recommends to people nowadays to pay the minimums while saving up a fund.

Accordingly, I'd say with this "very very large check", that your first priority be an emergency fund that can pay your basic expenses for three to six months, and THEN paying off as much of the $9k balance as you can with what's left. As some pointed out, student loans is a lesser degree.

As for the credit-score consequences of living without using a credit card, The Simple Dollar was surprised to find it didn't hurt their credit score much at all. Whether that's a one-off or not, who knows.
posted by WCityMike at 8:47 AM on February 25, 2010 [1 favorite]


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