nidena
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Post by nidena on Jan 11, 2023 9:01:25 GMT -5
Trying to decide on whether the snowball or the avalanche will be my chosen route. Or savings.
I have an annuity that can be liquidated come March. It's one of those guaranteed 1% rates and I deposited $5000 back in 2016. Two years ago, I also got a CD that is worth just over $1000. The intent was to combine them and deposit them into my Roth but I feel like it's better to get rid of the debts that I incurred this summer.
So, it's a total of ~$6520 coming my way and two debts that I choose from:
The PL which will have a balance of ~$4000 come March 1st with an interest rate of 7.4% and a payment of $156/mo. The remaining funds would definitely go towards the Visa. The Visa which will have a balance of ~$9000 come March 1st and an interest rate of 12.65%.
Or...I could max out my Roth for 2021 and use the remainder to pay down the Visa. Because of my pension and disability, I'm not so heavily focused on the Roth.
Another route that I'm looking at. My bank has a promo going on through Feb 28th that has a BT of 0% for 12 months with a 0% fee (as well as 0% on purchases for 12 months). I figured I'd apply and see what the limit is and then transfer as much as possible.
My CC balances topped out at $14,000ish last month (Nov not Dec) but I pay a net of ~$1500 towards it each month.
That $156 isn't large by any means but, as with any good snowball, it would fully eliminate one debt if I paid towards the PL. But I also know the avalanche method will reduce the overall interest paid because it will drop the balance on the largest rate if I pay it that way.
Your thoughts?
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jerseygirl
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Post by jerseygirl on Jan 11, 2023 9:07:17 GMT -5
How much interest would you actually not have to pay if you compare these plans? Might be a small amount. If negligible, I’d rather have some debts completely eliminated
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Post by minnesotapaintlady on Jan 11, 2023 9:50:53 GMT -5
I do better if I can focus on one thing, so the snowball method would work better for me. I doubt I would consider the Roth over 7 and 12% debts.
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haapai
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Post by haapai on Jan 11, 2023 10:26:11 GMT -5
Do you know what the penalties for breaking the CDs early are? Usually, they amount to a few months of interest, which doesn't add up to much when the interest rate is 1%. I suspect that if you broke them both today and applied them to the credit card debt at over 12%, you'd be ahead of the game within a month.
I know that this is not what you want to hear.
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haapai
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Post by haapai on Jan 11, 2023 10:41:10 GMT -5
How much interest would you actually not have to pay if you compare these plans? Might be a small amount. If negligible, I’d rather have some debts completely eliminated It's possible to build a spreadsheet that calculates the difference in interest paid between the two options. Calculating that number is very, very useful.
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Tiny
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Post by Tiny on Jan 11, 2023 11:03:42 GMT -5
An off the cuff check of a credit card interest calculator says that $12,000 at 12.65 with a monthly payment of 1500 will take 9 months to pay off and cost $470.00 in interest.
I'm assuming the CC is at 12,000 or so today... I didn't do the Personal Loan total interest paid. too lazy to google another calculator.
I guess the course to take depends on how "inconvenient" paying say $700 in interest (guesstimate total) for the two loans over the next 9 to 10 months is to the OP.
Is the Credit card in daily use? As in are more changes being added to it? That kind of plays into the decision as well.
To the OP's question about pay down method: I tend to like to pay off the highest interest debt first. Especially when the debt can be retired in 12 to 18 months (short term debt). So, I guess that's the "snowball" method.
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Post by minnesotapaintlady on Jan 11, 2023 11:16:27 GMT -5
To the OP's question about pay down method: I tend to like to pay off the highest interest debt first. Especially when the debt can be retired in 12 to 18 months (short term debt). So, I guess that's the "snowball" method. Actually, that's what is considered to be the "avalanche" method. The snowball is paying off the lower balance accounts first then rolling the payment to the higher balance after paying them off.
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haapai
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Post by haapai on Jan 11, 2023 11:23:24 GMT -5
I did the spreadsheets comparing the payoff strategies. I was surprised by the result.
Throwing everything at the visa balance in march will cost you about $164.78 in interest charges. $36.75 on the visa and $128.03 on the personal loan. It will only take two months to pay off the visa and seven months to pay off the rest of the personal loan if you pay a total of $1656 a month.
If you pay off the personal loan first, put the rest toward the visa, and then pay $1656 a month toward the visa, you will land up paying $172.41 in interest. There will be five payments.
The difference between the two plans is indeed negligible -- $7.63.
Scratch that. I found an error in my spreadsheet.
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haapai
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Post by haapai on Jan 11, 2023 11:35:06 GMT -5
It wasn't a hard error to fix.
I did the spreadsheets comparing the payoff strategies. I was surprised by the result.
Throwing everything at the visa balance in march will cost you about $177 in interest charges. $36.75 on the visa and $140.25 on the personal loan. It will only take two months to pay off the visa and seven months to pay off the rest of the personal loan if you pay a total of $1656 a month.
If you pay off the personal loan first, put the rest toward the visa, and then pay $1656 a month toward the visa, you will land up paying $172.41 in interest. There will be five payments.
The difference between the two plans is indeed negligible -- $4.59
I have not fixed the error yet. This result is also wrong.
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Artemis Windsong
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Post by Artemis Windsong on Jan 11, 2023 11:53:16 GMT -5
I'm anti interest payment on CC. Therefore, I'd pay off the CC debt and not allow it to get to that point. Then the PL. Then no debt except those that are necessary and forced to have like insurances, utilities, cars, housing and food.
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Post by minnesotapaintlady on Jan 11, 2023 11:57:16 GMT -5
There are online calculators to compare the dollar difference But you can't ignore the psychological part either. The one that is better is the one that you'll stick with. I just had a similar conversation with a coworker this morning that made this "Christmas Savings Safe". Omg. It's literally this box that is sealed up with duct tape all around it. You'd have to destroy it to get it open and get the money out and she has some 52 week challenge as well as putting any $5 bills she comes across in this box. I asked her if it wasn't just easier to determine a dollar amount she wanted to save towards Christmas and have it auto-deducted from her paycheck into another account and she immediately responded, "NO!, I will just raid that all year". So, not probably the best method to get the most dollars for Christmas mathematically, compared to putting an equal amount into a savings account paying 2.5% right now (and certainly more work!), but if it works for her the duct tape box is better.
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pulmonarymd
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Post by pulmonarymd on Jan 11, 2023 12:03:50 GMT -5
There are online calculators to compare the dollar difference But you can't ignore the psychological part either. The one that is better is the one that you'll stick with. I just had a similar conversation with a coworker this morning that made this "Christmas Savings Safe". Omg. It's literally this box that is sealed up with duct tape all around it. You'd have to destroy it to get it open and get the money out and she has some 52 week challenge as well as putting any $5 bills she comes across in this box. I asked her if it wasn't just easier to determine a dollar amount she wanted to save towards Christmas and have it auto-deducted from her paycheck into another account and she immediately responded, "NO!, I will just raid that all year". So, not probably the best method to get the most dollars for Christmas mathematically, compared to putting an equal amount into a savings account paying 2.5% right now (and certainly more work!), but if it works for her the duct tape box is better.
This. Logic very rarely works in these situations. However you get to where you want to be works.
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haapai
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Post by haapai on Jan 11, 2023 12:09:42 GMT -5
Third try. Very different result.
Paying off the personal loan in march and then throwing the amount left over at the visa and upping your payment to $1656 a month will result in you paying about $172.41 in interest charges afterwards. There will be five additional payments, the last of which is very small.
Throwing everything that you get from the CDs at the visa will result in you paying approximately $36.75 in additional interest charges on the visa and $78.56 on the personal loan. The important thing here is that the moment you pay off the visa, you start throwing that usual payment toward the personal loan. Total additional interest paid using this complicated plan that you don't like is about $115.31. On the other hand, there are only two more visa payments and four more payments on the personal loan. That creates a nice payoff momentum.
You'd save about $57.10 by putting the matured CDs toward the visa.
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haapai
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Post by haapai on Jan 11, 2023 14:45:37 GMT -5
Almost every time that I build one of these spreadsheets, the additional interest number is less important than what I learn about when debts will be extinguished.
This one was particularly surprising. Usually, targeting the higher interest debt creates a long interval where nothing gets paid off and enthusiasm for paying down debt flags. Something a bit different happened this time.
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haapai
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Post by haapai on Jan 11, 2023 18:01:44 GMT -5
There are online calculators to compare the dollar difference But you can't ignore the psychological part either. The one that is better is the one that you'll stick with. I just had a similar conversation with a coworker this morning that made this "Christmas Savings Safe". Omg. It's literally this box that is sealed up with duct tape all around it. You'd have to destroy it to get it open and get the money out and she has some 52 week challenge as well as putting any $5 bills she comes across in this box. I asked her if it wasn't just easier to determine a dollar amount she wanted to save towards Christmas and have it auto-deducted from her paycheck into another account and she immediately responded, "NO!, I will just raid that all year". So, not probably the best method to get the most dollars for Christmas mathematically, compared to putting an equal amount into a savings account paying 2.5% right now (and certainly more work!), but if it works for her the duct tape box is better.
I looked up that calculator. I've looked up similar calculators before. Most of them are kinda awful. I see red when I see them asking for the minimum required payment on a credit card denoted as a dollar amount. Most of the time, the minimum required monthly payment on a credit card is determined by the balance and is not a set amount. Garbage in/garbage out applies here.
These calculators also are pretty awful about letting you vary the amount of a monthly payment, such as when you put a tax refund, a gift, or the proceeds of a maturing CD toward a debt. They also stink if your income or expenses vary seasonally and the amount that you will be able to pay each month will also vary.
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Post by minnesotapaintlady on Jan 11, 2023 18:10:31 GMT -5
There are online calculators to compare the dollar difference But you can't ignore the psychological part either. The one that is better is the one that you'll stick with. I just had a similar conversation with a coworker this morning that made this "Christmas Savings Safe". Omg. It's literally this box that is sealed up with duct tape all around it. You'd have to destroy it to get it open and get the money out and she has some 52 week challenge as well as putting any $5 bills she comes across in this box. I asked her if it wasn't just easier to determine a dollar amount she wanted to save towards Christmas and have it auto-deducted from her paycheck into another account and she immediately responded, "NO!, I will just raid that all year". So, not probably the best method to get the most dollars for Christmas mathematically, compared to putting an equal amount into a savings account paying 2.5% right now (and certainly more work!), but if it works for her the duct tape box is better.
I looked up that calculator. I've looked up similar calculators before. Most of them are kinda awful. I see red when I see them asking for the minimum required payment on a credit card denoted as a dollar amount. Most of the time, the minimum required monthly payment on a credit card is determined by the balance and is not a set amount. Garbage in/garbage out applies here.
These calculators also are pretty awful about letting you vary the amount of a monthly payment, such as when you put a tax refund, a gift, or the proceeds of a maturing CD toward a debt. They also stink if your income or expenses vary seasonally and the amount that you will be able to pay each month will also vary.
I think the assumption is you will never pay less than the current monthly minimum payment (since you're trying to pay down the debt), so the fact that the minimum decreases shouldn't matter. It's also just comparing the two methods based on continuing to pay that combined minimum payment to see which one is mathematically better. (in this case the Avalanche wins 47 months to 48). Paying MORE shouldn't change anything, just shorten the payoff date.
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haapai
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Post by haapai on Jan 11, 2023 19:38:09 GMT -5
But you don't use this tool to figure out which is mathematically better. You use this tool to figure out how much better one strategy is than the other and this tool does not calculate that accurately unless you have only installment debts and credit cards with balances low enough that the minimum required payment has been set to a set dollar amount or the balance, whichever is lower, which are becoming rarer these days.
This tool underestimates the cost of targeting smaller debts with lower interest rates while paying the minimum amount required on a more expensive credit card debt whose minimum payment will decrease as the balance is paid down. The longer the payoff period takes, the more inaccurate the tool becomes.
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Post by minnesotapaintlady on Jan 11, 2023 21:21:26 GMT -5
But you don't use this tool to figure out which is mathematically better. You use this tool to figure out how much better one strategy is than the other and this tool does not calculate that accurately unless you have only installment debts and credit cards with balances low enough that the minimum required payment has been set to a set dollar amount or the balance, whichever is lower, which are becoming rarer these days.
This tool underestimates the cost of targeting smaller debts with lower interest rates while paying the minimum amount required on a more expensive credit card debt whose minimum payment will decrease as the balance is paid down. The longer the payoff period takes, the more inaccurate the tool becomes.
Sometimes over analyzing and making things more complicated than they need to be does more harm than good.
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nidena
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Post by nidena on Jan 12, 2023 9:05:03 GMT -5
Do you know what the penalties for breaking the CDs early are? Usually, they amount to a few months of interest, which doesn't add up to much when the interest rate is 1%. I suspect that if you broke them both today and applied them to the credit card debt at over 12%, you'd be ahead of the game within a month.
I know that this is not what you want to hear.
I got the CD with an end date that would coincide with the maturity of the VA so that I'd have $6000 when the time came. That time will be the end of February.
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nidena
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Post by nidena on Jan 12, 2023 9:22:00 GMT -5
I do use the card throughout the month. I hate debit cards and have for a couple decades after mine was stolen...more than once...and funds depleted. Too many skimmers out there for me to feel comfortable using my debit so I use my credit card.
I did apply for, and was approved, for the CC with the 0% BT (for 12 months) and no fee. It also has 0% for purchases for the next 12 months but, if I can transfer a large chunk from my Visa, my monthly purchases will have no interest, anyway, because I'd pay it off every month.
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haapai
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Post by haapai on Jan 12, 2023 9:53:00 GMT -5
I'm off the break-em-early kick now. I also apologize for turning the much-larger annuity into a CD. I have no idea what cashing that out early would cost you and you don't need the failure.
But the main reason that I am comfortable with letting them mature is that it gives you time to get your visa balance down low enough that you can find it in yourself to put that all of that $6K+ toward it. It would be quite difficult for you to do that at a time when your balance is somewhere around $12K. It will be quite a bit easier to do if your credit card balance is closer to $9K.
It will still be hard though. You might want to spend the next six weeks finding good reasons to do it.
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haapai
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Post by haapai on Jan 12, 2023 11:07:58 GMT -5
A 0% one-year balance transfer is a good way to move a chunk of debt off of the 12.65% card and may even allow you to get it paid off (or at least not charging you interest) before the $6+K arrives. The amount of interest that this can save you is getting quite exciting.
There are still some mildly tricky bits to figure out. You may have finance charges to pay even after you have gotten the old credit card paid off and the minimum payments on the BT card may be a surprise and something that you'll have to add to your plan. That might make for a lot of checking and double-checking before making big payments, especially if you get the majority of your income paid monthly.
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Post by The Walk of the Penguin Mich on Jan 12, 2023 11:50:34 GMT -5
I do use the card throughout the month. I hate debit cards and have for a couple decades after mine was stolen...more than once...and funds depleted. Too many skimmers out there for me to feel comfortable using my debit so I use my credit card. I did apply for, and was approved, for the CC with the 0% BT (for 12 months) and no fee. It also has 0% for purchases for the next 12 months but, if I can transfer a large chunk from my Visa, my monthly purchases will have no interest, anyway, because I'd pay it off every month. I paid off about $30k in credit card debt via a balance transfer. Since I knew I needed to retrain myself in how I used them, but cards make life easier, and I don’t use debit cards, I got an Amex card. I had to pay the AmEx card off each month, there was no carry over. It allowed me to use a card and meant I HAD to keep track of spending. It took me about 3 years to pay off my debt, and by then my retraining had stuck. I can now use a regular credit card and pay it off monthly and not give it a second thought. I will admit, I had a few rough months where I didn’t keep track of what I owed as well as I thought I had and found it painful to pay my Amex in full. Having done this myself, I really suggest NOT using the card you did the BT to. If you don’t go with something you MUST pay in full monthly, go to cash. Otherwise, you’ll find yourself in deeper shit. I did this too, my first attempt was a false start and I did another BT and cut up the card so I couldn’t use it. Luckily for me at the time 0% was fairly common at the time, not so much now and I got them all for the life of the loan.
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Tiny
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Post by Tiny on Jan 12, 2023 12:54:47 GMT -5
I do use the card throughout the month. I hate debit cards and have for a couple decades after mine was stolen...more than once...and funds depleted. Too many skimmers out there for me to feel comfortable using my debit so I use my credit card. I did apply for, and was approved, for the CC with the 0% BT (for 12 months) and no fee. It also has 0% for purchases for the next 12 months but, if I can transfer a large chunk from my Visa, my monthly purchases will have no interest, anyway, because I'd pay it off every month. This kind of changes things... Do you know if your new purchases immediately start accruing interest? Or does the card allow new purchases a "grace period" and are you paying those new purchases in full every month (and not adding additional interest charges) AND hitting the balance accruing interest every month? Also, it's possible that even once you do pay off the balance - unless you literally Zero the card (with no new charges for a billing period) you may continue to be charged interest on the new purchases. I may be out of date with the above "way the card and interest may work". More than 10 years ago, my nephew had credit card debt (not a lot but was carrying a balance every month). He never realized he was paying interest on new purchases from the day they hit his account. And then when he did make that "final" payment - and was able to pay in full every month - he was still trapped and paying interest on new purchases... He was young, not earning a lot, had a crappy credit score, and didn't have many options. He was trying to get his ducks in a row in order to buy a house I was selling. Getting him out of the tangled web that is credit card debt was difficult and took time. He wasn't able to get another card and stop using the card with a balance. I use to think credit card debt was "easy" to deal with if you could stick to the "paying it down every month" - I never realized how many impediments there were in the way to actually getting the debt paid off. I don't consider it an "easy" thing after my nephew's experience. It can be a pit of despair for those with not enough income and it can be "giant money suck" for those with the money to eventually get it paid offf. Perhaps credit card reform has improved the way interest is done.
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Post by minnesotapaintlady on Jan 12, 2023 13:06:56 GMT -5
Perhaps credit card reform has improved the way interest is done. No. Interest accrues immediately on new purchases if you have an unpaid balance.
nidena you should either switch to your debit or get another card that can be paid off every month for your ongoing purchases. By continuing to charge on those cards you're paying a premium on every purchase for no reason.
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Tiny
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Post by Tiny on Jan 12, 2023 13:08:49 GMT -5
I'm not totally debt adverse. Debt is a tool. It's not evil or bad.
Just throwing this out there - a way to think about paying interest on debt is that you are buying money. Generally when you buy something you want to get a good deal and not over pay. That's why a low interest rate is good... you are paying less for the money you bought. This is why you look at the total amount paid in interest when trying to decide which debt to pay off first (or how to structure how you will pay down your debt). You want to get a "good deal".
When you shop for something if getting a "good deal" or "saving money/paying less" makes you feel good... the same thing goes for paying down debt, why pay more if you don't have to?
Maybe I'm totally off - but that is how I think about any debt I'm paying interest on... how much am I paying for the "money" I bought. And is that a good price for what I'm getting (or what I used the money I bought to buy.) I think this is why my mortgage debt doesn't bother me. Having a car loan doesn't bother me either. I got "good deals" on the loans and got "good deals" on the purchase price of the house (or car).
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haapai
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Post by haapai on Jan 12, 2023 13:21:33 GMT -5
(In reference to Tiny's recent post)
Weird things can happen when you attempt to pay off a balance that has been charging you interest. Watch out for them.
ETA: This is not an argument for never using your old credit card again. It is definitely not an argument for using the BT card instead! It's an argument for making damn sure that you are not being charged interest after you have paid the card to zero. You almost have to pay the card to zero, pay off the entire balance of new purchases at the end of the cycle, and still keep an eye on it for another month. It's darned irritating and tricky.
Also, my credit union does weird things whenever I make multiple payments in a cycle. It seems to trigger an interest charge. Then the credit union reverses the interest charge without me having to do anything. It's annoying as heck!
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Post by The Walk of the Penguin Mich on Jan 12, 2023 14:02:58 GMT -5
I do use the card throughout the month. I hate debit cards and have for a couple decades after mine was stolen...more than once...and funds depleted. Too many skimmers out there for me to feel comfortable using my debit so I use my credit card. I did apply for, and was approved, for the CC with the 0% BT (for 12 months) and no fee. It also has 0% for purchases for the next 12 months but, if I can transfer a large chunk from my Visa, my monthly purchases will have no interest, anyway, because I'd pay it off every month. This kind of changes things... Do you know if your new purchases immediately start accruing interest? Or does the card allow new purchases a "grace period" and are you paying those new purchases in full every month (and not adding additional interest charges) AND hitting the balance accruing interest every month? Also, it's possible that even once you do pay off the balance - unless you literally Zero the card (with no new charges for a billing period) you may continue to be charged interest on the new purchases. I may be out of date with the above "way the card and interest may work". More than 10 years ago, my nephew had credit card debt (not a lot but was carrying a balance every month). He never realized he was paying interest on new purchases from the day they hit his account. And then when he did make that "final" payment - and was able to pay in full every month - he was still trapped and paying interest on new purchases... He was young, not earning a lot, had a crappy credit score, and didn't have many options. He was trying to get his ducks in a row in order to buy a house I was selling. Getting him out of the tangled web that is credit card debt was difficult and took time. He wasn't able to get another card and stop using the card with a balance. I use to think credit card debt was "easy" to deal with if you could stick to the "paying it down every month" - I never realized how many impediments there were in the way to actually getting the debt paid off. I don't consider it an "easy" thing after my nephew's experience. It can be a pit of despair for those with not enough income and it can be "giant money suck" for those with the money to eventually get it paid offf. Perhaps credit card reform has improved the way interest is done. Depending upon the card, if it’s not paid in full by the end of the period, those purchases may have started to accrue interest at the point of service point. There are a few 0% interest rate cards that work this way too. Not long after I started this journey, I was in the hospital for surgery. I (stupidly, it was after this event that I cut the card up) grabbed one of the 2 cards I had done the BT to to pay my drug bill of $40. That $40 probably accrued $400 in interest before I got that card paid off as it was the last thing that payments were sent to. Since then, this has changed and some money has to be paid against these charges, but it is just easier to cut the card up so you don’t screw up.
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haapai
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Post by haapai on Jan 12, 2023 14:13:39 GMT -5
This kind of changes things... Do you know if your new purchases immediately start accruing interest? Or does the card allow new purchases a "grace period" and are you paying those new purchases in full every month (and not adding additional interest charges) AND hitting the balance accruing interest every month? Also, it's possible that even once you do pay off the balance - unless you literally Zero the card (with no new charges for a billing period) you may continue to be charged interest on the new purchases. I may be out of date with the above "way the card and interest may work". More than 10 years ago, my nephew had credit card debt (not a lot but was carrying a balance every month). He never realized he was paying interest on new purchases from the day they hit his account. And then when he did make that "final" payment - and was able to pay in full every month - he was still trapped and paying interest on new purchases... He was young, not earning a lot, had a crappy credit score, and didn't have many options. He was trying to get his ducks in a row in order to buy a house I was selling. Getting him out of the tangled web that is credit card debt was difficult and took time. He wasn't able to get another card and stop using the card with a balance. I use to think credit card debt was "easy" to deal with if you could stick to the "paying it down every month" - I never realized how many impediments there were in the way to actually getting the debt paid off. I don't consider it an "easy" thing after my nephew's experience. It can be a pit of despair for those with not enough income and it can be "giant money suck" for those with the money to eventually get it paid offf. Perhaps credit card reform has improved the way interest is done. Depending upon the card, if it’s not paid in full by the end of the period, those purchases may have started to accrue interest at the point of service point. There are a few 0% interest rate cards that work this way too. Not long after I started this journey, I was in the hospital for surgery. I (stupidly, it was after this event that I cut the card up) grabbed one of the 2 cards I had done the BT to to pay my drug bill of $40. That $40 probably accrued $400 in interest before I got that card paid off as it was the last thing that payments were sent to. Since then, this has changed and some money has to be paid against these charges, but it is just easier to cut the card up so you don’t screw up. I remember that toxic little trick. I'm fairly sure that it got outlawed about a decade ago. Yes, it was evil.
Now payments must be applied to the parts of the balance that carry the highest interest rate first.
But getting back to the dirty that was done to you, there were even worse versions of it. There were zero-interest and low-interest cards that solicited balance transfers that required you to make a certain number or amount of new purchases each billing cycle, often at awful interest rates, that you couldn't pay off until you had paid off the entire balance transfer.
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nidena
Senior Member
Joined: Dec 28, 2010 20:32:26 GMT -5
Posts: 3,582
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Post by nidena on Jan 12, 2023 15:14:05 GMT -5
My card is one of those where, so long as I pay the statement balance, it won't charge interest, even if I bought another $2000 in stuff.
So, the new card has a Limit of $5400. I'm inquiring to see if I can increase it. Whether I can or not, I will transfer as much as possible from the Visa to the new card. I don't plan on using the new card for purchases. I also won't be going to cash for purchases. I will focus on paying as much as possible to the Visa, the minimum on the new card once the BT goes through, and then reassess come March.
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