3% Interest for 6 Months

[kae]

Just before I discovered Dave Ramsey (and I do mean JUST before, mere DAYS before), I applied for a Discover Card with 3.99% interest on transferred balances for the first 6 months. Most of my credit cards have the normal, outrageous interest rates of about 19%-23%.

I transferred $1700 of my $6008 balances onto this card. I plan on paying down my two smallest credit card balances ($145 and $401) first, building a snowball to pay towards my biggest debts. I will have these two cards paid off on February 5, and will begin to apply that $546 to my next debts.

Here's my question: Dave says to pay off the smallest to largest REGARDLESS of interest rates. However, 3.99% and 23% seem like such a significant difference to me. After 6 months, the interest rate on the Discover card goes back up to 23%. Shouldn't I pay off this card before attacking the cards with higher interest rates?

The balance is $1700. Starting in March, I will be able to pay $546, plus whatever extra I can squeeze out of my budget, towards a card. The 3.99% lasts until May. That gives me three months. $546 x 3 is $1636. I'm sure that I can squeeze out the extra from my budget to cover the extra $64, plus the interest.


My other lower debts are:

$898 at 19.99%
$1112 at 22.99%
$1468 at 12.14%

So, what would you do?

[Frizzysky]

Won't the small 3% interest jump up to something outrageous if you don't pay it off in a certain amount of time?

I would make sure THAT one gets paid off within the time frame you have if the interest of 3% is just for a limited amount of time.

[Natalia]

Those interest rates are high. Have you ever called to see if you can get it lowered, or pay a small annual fee to get a lower rate? Depending on the balance, it could pay for itself the first month.
I have two debts, a loc at 5.9 and a M/C at 12.9...the 12.9 kills me..20% would drive me insane..

[kae]

Yes they are outrageous! I'm paying them off with a quickness and then closing the cards with rates in the 20s. I will only keep the 12% card for emergencies, as it's my last card. It will be locked away and not easily accessable. I'm not in a good enough place yet to have zero cards. Once my EF is at about 6-12 months, I will close it as well.

Yes, the 3% will climb to 20% after the 6 months is over.

ETA; I haven't had luck getting the rates lowered. May have to call and request it again.

[nuisance26]

~If I'm understanding you right, you're thinking about paying off the $1700 debt at 4% interest because it will go up to 23% interest in 3 months? Yes, that's a high interest rate but right now you're saving interest by having that balance at a lower rate. Now that you've freed some money in your budget for a snowball, you can knock off some other cards. The combined interest you'll save by having those paid up with your freed money should negate the effect of the 23% interest. But your snowball will be bigger so you should pay less interest overall since you'll be able to pay it off faster. There are online calculators to use to help you make this decision. I'll see if I can find one.
I think I would use that $546 in March, April & May to pay off card:
$1112 at 22.99%
And the rest of the that $546 in month 3 to:
$898 at 19.99%
For May/June you will have a larger snowball from that first paid off card. So you might be able to pay of the balance left of the $898 card in one payment.
Then I think I'd move onto the card you now have at 4% that will go up to 23%. The balance of that card is higher than:
$1468 at 12.14%
but your interest rate is better on the lower balance card.
So this is how I would probably do it:
$1112 at 22.99%
$898 at 19.99%
$1700 at 20%
$1468 at 12.14%
Hopefully you get a great tax return you can apply to your snowball so you can knock out that 23% card ASAP. ~

[nuisance26]

~Here's a calculator but it's not the one I remember seeing a few years ago. Debt Snowball Calculator | Financial Calculators Still looks good though. You can plug in different scenarios to see how much interest you'd be paying with different payoff orders.~

[nuisance26]

~Ok, I have too much time on my hands today! I plugged in your numbers in the calculator and, although I don't know the amount of your payments/how much each would increase your snowball, I see that you will be able to pay off all those cards this year! That's terrific!
Running a couple different scenarios, it looks like there is a $ difference of about $50 more in interest over the year if you delay paying off the 23% card until last. DR often counsels about the psychological advantage of having less cards to pay. I'm not sure how applicable that is to you since I think your snowball amount is so great to begin with. It will only take you a couple of months per card. And $50 saved is $50 earned! You could get a nice little reward for your hard work with that. ~

[kae]

Wow, nuisance26, I really appreciate you taking the time to do all that! Yes, I have loosely planned out the year and it does look like all of my cards will be paid off by December... maybe even before if I can continue to pinch pennies in other places.

I actually didn't even consider the interest saved if I keep that money on the 3% card while paying down those with a higher percentage. I should have, but I wasn't thinking in that direction. I was more focused on paying it down while the interest rate is so low.

I will play with the calculator you linked, but am just a little confused by your last post. What I think you're saying is that I'll save $50 in interest if I pay off my cards in this order, saving the card that currently has the 3% interest for last rather than paying it first:

$1112 at 22.99%
$898 at 19.99%
$1468 at 12.14%
$1700 at 23%

The part that is a little unclear to me is when you said "a $ difference of about $50 more in interest"... I'm not sure if you mean more interest if I pay it first, or if I pay it last. You did say if I delay it until the last card... meaning, tweak the order? I guess the best thing is for me to go check out the calculator myself! I just wanted a little clarification, if you don't mind! If you could post the order of paying off that would save me the $50, that would be awesome.

Thanks again!

ETA: OH, I see a mistake. In my last post, I said that it would climb from 3% to 20%, which is a typo. It will climb to 23%. I believe this is where some of my confusion came from.

[mndtrp]

If you don't pay off the balance of the 3% card, and you go to 23%, will you be hit with the accumulated interest you originally missed out on? For clarification, if I make a large purchase on my Home Depot card, I get no interest for a year. If I do not pay off that balance within the year, I get the interest I would have accrued added into the balance.

As you said, Ramsey wants you to pay off the lowest balance first. I believe this is for psychological reasons, making you feel like you're getting somewhere, as well as to free up cash flow for your snowball. It also allows you to close out the credit card that was paid off, removing the temptation to run it up again.

This is where Ramsey and I differ. If you don't really need the cash flow, and you can control your spending without issue, paying off the highest interest rate first will save you money over the long term. The $200 difference between the highest interest rate account, and the lowest balance account, isn't much, so I don't thin it will matter a whole lot overall.

[kae]

If you don't pay off the balance of the 3% card, and you go to 23%, will you be hit with the accumulated interest you originally missed out on? For clarification, if I make a large purchase on my Home Depot card, I get no interest for a year. If I do not pay off that balance within the year, I get the interest I would have accrued added into the balance.

Thank you mndtrp, this is a great question and something I didn't think about. I will have to call and get clarification on this. It will definitely make the difference between which card to pay down first!

[ncarr]

Dave would say to pay the lowest principal amount first. I disagree with him in your case because I would snowball the debt with the highest interest rate first to save money on shelling out interest.

[Elshasha]

The only thing that you have to remember is that Dave's works on a psychological level. The idea is that when you have to pay off a lot of debt, having a few small wins (i.e. paying of the lowest debts really quickly) will quick start the process and give you more motivation to follow through.

While paying of the 3% credit card makes more sense mathematically...dave's plan works on a more emotional level. The question really comes down to whether you are a person who needs help with keeping up the motivation or if you are more interested in saving money. Remember that if you give up half way through it will cost you a lot more in the long run.

[kae]

Thank you for the input. You've definitely given me a few things to think about!

[nuisance26]

I will play with the calculator you linked, but am just a little confused by your last post. What I think you're saying is that I'll save $50 in interest if I pay off my cards in this order, saving the card that currently has the 3% interest for last rather than paying it first:

$1112 at 22.99%
$898 at 19.99%
$1468 at 12.14%
$1700 at 23%

~No, my last post was a switch from the order I suggested paying them off. Because after running the percentages and balances into that calculator, you would save about $50 in interest by paying off the $1700, 4% interest card before it balloons to 23%.
So to get that $50 in saved interest you'd pay:
$1700 at 4%
$898 at 19.99%
$1112 at 22.99%
$1468 at 12.14%
But since I don't know your exact payment amounts and how much each paid off card would add to your snowball, you'll have to double check me on the calculator!~

[Greebo]

Dave answer: You're doing math now? Why didn't you do the math BEFORE you took on the debt???

My answer: IF the 3% will be retroactively 23% in 3 months, pay it off first, as much as you can, to avoid the bleeding, then go smallest to largest.

The psychological victory IS important - but losing 20% retroactively is very psychologically painful too.