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08/11/2014

The Trouble with Credit Cards: Part II

In last week's post, I wrote that I had reduced my credit card debt to $10,120.  However, only $7511 is still actually on credit cards; the other $2609 is now in the form of a car loan.  In this week’s blog, I am going to explain exactly how I'm addressing my credit card debt and the problems that exist with trying to pay off credit cards.

Problem #1: Having high interest rates
How I'm addressing the problem: When I began Project Money, I had five credit cards with balances on them.  One card I paid off every month (a Menards card), so when the competition began, I paid it off as I normally would.  I also have one card that I used to purchase the flooring of my recent basement remodel, which has 0% interest until March 2015; I am paying a fixed amount each month on this card so that it will be paid off in full by that time.  My other three cards, though, each had balances with varying APRs.  My two Chase cards, at 10.24% and 11.99%, totaled just about $3000; Adam suggested that we take out a $3000 loan against my car at 2.79%.  I did not know that this was possible, but it is!  This solution is now saving me about $20 a month in interest on these cards!

Problem #2: Having a card with multiple balances
How I'm addressing the problem: Since I (stupidly) took advantage of Discover's "kind offers" of 0% interest on various purchases and/or balance transfers, I'm now stuck with a big problem: my card has multiple balances, each with their own APR.  Discover (wisely) applies your payment to the interest first and then to the balance with the lowest APR.  So, unfortunately, my payments are going towards balances with 0% APR, not towards the $2200 balance that sits at 15.99% APR.  Ugh. 

Adam and I have wrestled with "what to do" about this for most of the past month and we've concluded that it's best to just put all extra money towards this card and pay off the card's entire balance as quickly as possible.  We did explore other options: taking out a home equity loan (1.9% for 6 months and then 3.4% thereafter) or doing a balance transfer to another card (0% for 12 months).  But with both options I'd need to pay loan or transfer fees and we calculated that these fees would end up being almost the exact same amount that I'd pay in interest if I just paid off the card in the same time frame.  So, paying it off as quickly as possible is what I'll be doing!

Comments

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Katie, I had no idea that cards had ways of hooking a consumer into multiple balances with different APRs. That is not cool. I'm really glad you are sharing this so that other people will hopefully avoid those offers. This is a really good example of the kind of sticky financial situations that Summit's financial coaches can help people (anyone, not just a project money person) fix. It sounds like you are making awesome progress.

Credit cards are very scary! ...I didn't even realize that you can have multiple balances on 1 card. Kudos to you for aggressively paying towards this loans.

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