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The Finances and Debt Thread

Discussion in 'Off Topic' started by The Process God, Mar 13, 2016.

  1. The Process God

    The Process God Birthing All-Stars

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    First off, please merge this thread with any other threat that already covers this topic, but I thought I'd make this thread (1) because it's an important topic for many, and (2) my wife refuses to listen to my logic without other official authorities like "financial advisers" backing me about how I believe we can get out of debt a little bit faster using my way of doing things. I also want to hear perhaps other avenues for helping me get out of debt.

    Now my wife believes that following "budget A" (a budget that allows for X amount of debt repayment per month) and paying for everything in cash/debit is the fastest way of doing things.

    I believe that I've found a slightly faster way of doing things, and please correct me if I'm wrong. I want cold, hard numbers only--not subjective, hypothetical scenarios about how my way could get us into more debt--to prove me wrong if I am. Anyhow, I believe that, if she and I were to follow the exact same budget, "budget A," but, instead of paying for things with cash/debit, I pay for anything I can with my lowest interest credit card available (~14% APR), then use the leftover cash to pay more towards my highest interest credit card (~24% APR).

    My logic is that, by doing things my way, although I am now incurring interest on my new debt on one credit card, that is more than wiped out by the interest I'm now NOT paying on my higher interest credit card because I put that money towards my highest interest credit card. Additionally, I get rewards that I wouldn't have otherwise gotten.

    In my method, I'd pay the maximum amount I could afford to for each paycheck the day I got the paycheck toward my highest interest credit card so as to minimize daily interest gained from my purchases.

    So here's my attempt at the math:

    Let's say that my income is $4k/month.

    Let's also say I have $2,000/month in expenses that can either be paid in cash or by credit card (so this is ignoring payments that I have no choice but to pay by any one given method).

    Now let's say that I have $18,000 in credit card debt (which is pretty accurate).

    Broken down as:

    Card A - 12k owed - 14% APR
    Card C - 6k owed - 24% APR

    If I pay the 2k in expenses with cash/debit, I have 2k to pay per month towards that credit card debt, thus reducing my total debt by 2k/month. The interest on all of that is roughly $260/month. The payment of $2,000 would go toward my highest interest credit card, thus saving me $40 in interest for the following month (2k*.02[1 month of interest on a 24% APR card].

    However, if I pay with my 14% APR credit card for everything, but then put the $4k completely toward my 24% APR card, I save $80 in interest on that card while accruing only an additional $23.33 in interest on my 14% APR credit card, thus saving an additional $16.66 per month.

    Assume that I have additional income to make the minimum payments for all debt either way for simplicity's sake.

    On top of that, I make an additional 2% reward with the 14% APR card, which puts me up to $40 additional made each month in rewards.

    That makes for a total of $56.66 per month saved by using this method, I believe.

    I know this doesn't account for daily interest and when payments are made vs when money is put on the card, but, even then, I believe that the max amount of interest that I could accrue from that is 1.167% interest per month on that 2k, which would be wiped out by the 2% rewards. Now, if I pay off the amount of each purchase I make on the 14% credit card that same day onto the 24% credit card, the interest I begin accruing on the 2k I just put on the 14% credit card starts the same day I stop getting interest on 2k on the 24% APR card.

    If you try to answer this question and are a financial adviser or anyone who works a lot with numbers and money, please state your credentials so that I can show my wife. And, if my way is actually costing more money, then I'll happily start heading in the right direction.

    Again, assume that I follow the exact same budget as my wife, never deviating from it, except it's all put on credit card.

    Now, my next question is, is there an even better way even if my way is better than my wife's? What about consolidation? Where can I go to get a loan with lower interest for that amount? Like maybe I could get a consolidation with 6% interest or even up to 12%? Or should I try to get approved for some 0% APR credit cards and do a balance transfer? If so, which ones?

    Anyone else, feel free to give your thoughts or ask your own questions about finances and/or debt.
     
  2. DJTJ

    DJTJ 3 ball... got it!

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    Agree 100% with your math. Was a finance major and a large proponent of budgeting (I once saved nearly 55% of take home pay in 3 months to create a 6 month window in case I couldn't find new work).

    I would say once the debt goes away though, that you'd stay on the model of all expenses on card, cash pays off card. It's a solid plan, because paying interest is super stupid unless it is absolutely necessary to charge something for more than you can afford to pay off quickly (my personal model for big purchases is < than 1 month can I pay it off? Is it worth one month (and two, three, etc) of interest payments?).

    I'll also offer up the advice that the word "saving" is a bit skewed. Yes, you're saving 56 dollars. But, even with you're own acknowledgement, it appears you're still adding 200 in interest every month, because the savings do not cancel out the 260 in new interest payments monthly. So you're saving from 260, but you're not saving from interest.

    My personal thought process would be to pay what you need to pay so that you're not taking on interest on either card (1.1667% on A, 2 on B), plus your min payment and save the rest. In 3-4 months, you should be able to pay card B completely off without accruing any interest and then be able to switch complete focus to paying card A.
     
  3. Lee

    Lee Gold Star Member

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    Take out a personal loan to pay off credit cards, and stop using credit cards you dont pay off in full every month.

    installment loan at 12% better than credit card at 5%. Look up Euler's factor to understand if you dont believe me. (e)

    Pay as much to personal loan as possible each month.

    Compound interest is evil. Get rid of it with a higher rate personal loan, trust me, it is what i do for a living, partially.
     
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  4. Lee

    Lee Gold Star Member

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    Also, if you cant get a personal loan (I would take out a 401k loan if possible, or go to a bank), pay off the smallest first, keep the card open, but cut it up. Dont close any cards until after all cards are paid off. You need to keep your credit up so your rates dont go up, dirty trick of the credit card companies. Best way to keep credit up is to keep the cards debt to limit ratio low. Zero really helps, but if you close, you lose credit for that.

    So, personal loan, pay off smallest cards first, take out a 401k loan if you have to, keep cards open till all debt is paid off. After, 3 cards that you pay off in full each month and never charge in any month more than 25% of the limit.
     
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  5. getBUCKED

    getBUCKED Solo Cup

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    I wouldn't spend on any of your cards right now because it doesn't seem like you're capable of doing so responsibly yet. Also don't fall into the trap that once you have paid off your CC debt that it's "okay" to start racking up new debt on credit cards again. Live below your means! Cut your spending as much as possible right now.

    If you use reddit, go over to r/personalfinance and ask them this same thing. You will get a lot of helpful advice and different strategies for your personal situation. Then, read their wiki and learn how to budget and spend responsibly. You're going to have to sacrifice, but $18,000 in credit card debt is no joke and can be crippling for a healthy financial future.
     
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  6. Pick6

    Pick6 Sixth Man

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    Cool thread idea. I'm always looking for ways to fine tune my finances. I agree with @getBUCKED that r/personalfinance is a great place to look around and read as well as r/frugal because you need to make some lifestyle cuts to pay these debts down.

    As for your actual problem, Lee has some good points although I advocate paying higher interest rates down rather than smallest balance. You will save more money in the long run this way. Regarding all the math, I didn't look to close into it because honestly my brain is fried right now due to working all weekend on top of long weeknights for the past 2 months (tax season, I'm a CPA). Bro, you may be on to something but it honestly seems like there are much bigger issues than getting fancy and saving a few bucks a month. You have 18k in high interest debt on top of who knows what else. Suck it up and go talk to a financial advisor, it will be more than worth it.
     
    Last edited: Mar 13, 2016
  7. Zog

    Zog Formerly Northstar. The Block, The Shot, The Stop

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    What is your credit score? I found a thread online where someone got approved with a 640 credit score for a Chase Slate card with a $20k limit. Chase Slate has $0 balance transfer fee for anything transferred in the first 60 days and 0% interest for 15 months. That'd be your best bet. Transfer the $18k to the card if you can get that high of a limit, stop using all your cards, pay everything in cash/debit, and throw what you have at the end of every month at paying off the balance.

    If you don't pay it off in 15 months, at that point in time go ahead and open up a personal loan for the amount you have left on the card, and pay off the card and then start on the loan. This method would be the lowest possible amount of interest you could pay.

    If you can't get approved for it, then go for the personal loan.

    The reason I like the above approach better than the personal loan is that you have more flexibility on a monthly payment. If an "oh shit" moment happens in the next 15 months and you can't afford to pay your monthly loan installment, you're in some trouble, if you can't pay the amount on the credit card one month, it doesn't really hurt you.
     
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  8. gourimoko

    gourimoko Fighting the good fight!

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    @Free Agency God , your method is absolutely correct. If you can transfer your debt to lower-interest credit accounts, then it is an absolute no-brainer to do this. It's really not a complex question, and you've definitely got the math right.
     
  9. cavsfan1985

    cavsfan1985 ^ kind of a big deal!

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    I would agree your math is spot on. As other have noted it might make sense to look into consolation it into a loan. It should not be hard to get a line of credit in the 8-10% range. This way you can have your debt payment and clear up those credit cards. This should have a positive effect on your credit as you will have cleared the debt off cc and put into a structure payment schedule.
     
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  10. Bill Walton.

    Bill Walton. Staffed Member

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    Most new credit card have a 15 month 0% interest rate for balance transfers. They'll charge generally a 3% fee for the money you transfer. I didn't read much of your post but if you have debt. Your best best is to chip away at the credit card with the highest interest rate and completely ignore the other until it's paid off. I work for a financial institution and have seen this a lot.

    I saw others suggest a personal loan to pay off the debt. That's also a good idea since the interest would be lower.

    An even better idea to to open a HELOC and payoff your debit that way. But that would involve you having equity in your home. Not sure if you're a home owner or if you have any equity. Any questions feel free to ask.


    Don't get in debt. It sucks. But I agree, avoid using your card since you'll only be adding to your debt. Check other institutions for a card with an introductory balance transfer.. It may be hard to get anymore credit since your debt to income ratio may be too high
     
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  11. Bill Walton.

    Bill Walton. Staffed Member

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    I just re read your post. I don't think it's a good idea to put more money on your card. Sure the rewards are nice, but that's just adding to the interest. The rewards take a little while to add up and i think avoiding more interest is your best bet. Not to mention if something came up and you had to access your credit card, it's best to have as much available as you can. I'm not 100% sure of your situation so it's hard to say.

    But I do highly recommend focusing on one credit card at a time. Highest interest rate first (In your case the 24%) . After that's paid off, do the same with the other credit card.
     
  12. cavsfan1985

    cavsfan1985 ^ kind of a big deal!

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    I would agree a line of credit on a home would be the best as you can get a tax right off and lowest cost.

    I also am a big fan of any type of line of credit though instead of a balance transfer. The reason is, unless you took on debt for a something you could not control having more credit cards could cause you to over spend. If you really want to get out of debt and cut your spending you have to get ride of the cards. It is a lot harder to spend cash. I have found when I avoid the credit card and use cash my month expenses tend to go down as it is painful to handover cash for silly things.
     
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  13. Bill Walton.

    Bill Walton. Staffed Member

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    If you have 2k you can use to pay off debt per month, a balance transfer would work because you'd be able to pay off 30k worth of debt by the end of the promotional period. (If it's 15 months) But you should not use your credit card for anything but paying off that debt
     
  14. The Process God

    The Process God Birthing All-Stars

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    Thanks for the advice, guys. I definitely know about paying off the highest-interest card first, although I understand that, strangely enough, it might not be best for my credit score because the interest rate on that card doesn't weigh that card higher against paying off several other credit cards.

    No one here lectured me too much, but, for the record, I lost my previous job in January of last year and moved to be closer to be near my fiancée (and now wife) on top of immigration fees, an immigration lawyer, getting robbed by a previous landlord, losing another job in June (neither one was my fault), getting in a car accident that raised my insurance rates dramatically (I'm disputing this because the guy slammed his brakes for no reason in the middle of an intersection) and forced me to get a new car, and having to throw down a lot of money on rent in the Seattle area. This all put me pretty heavily in the hole pretty quickly without being a crazy spender.

    My grandfather has a line of credit that is only 3% interest (he's been super responsible financially, which is why he has this). I have put some school loans on that line of credit under him. I might bite the bullet and ask to put that 18k in credit card debt onto that if he's willing and his bank is willing to do it.

    And wouldn't the $260 in interest be there each month anyway even if I didn't use the credit cards? I'm paying them down at the same rate.

    I have no equity, so that's not an option.

    The highest credit limit I have on any card is $5,000. I highly doubt I'd get enough on the Chase Slate for a balance transfer.

    Bill Walton, could you please give me a link to this Euler thing you're talking about? I have looked into it, but too many topics come up to pinpoint what you're talking about.
     
  15. Lee

    Lee Gold Star Member

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    Just google Euler's factor its also known as E.

    DO not use the cards or they will charge you interest even if paid off, credit cards are necessary sometimes, but are evil on how they charge interest.

    Use cash for everything, pick a card pay it off first, all the other make min payments, then move onto the next. You use the cards, you will get in trouble.

    Once all paid off, then you could start using again for points, etc.
     
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