Credit Card Debt Payoff Scenario: Would like opinions?

Question

Hypothetically, let's say I have nearly $4,500 on a credit card that has an interest rate of 3.99% for five years and I'm only in 1.5 years into it.

Would it be better to...

A:  Pay $150 per month, definitely more than the minimum, have the balance paid in December, 2012, and pay $246 in interest?

B:  Pay $150 per month until July, 2011, and then start paying off the balance with $375 per month until January, 2012 with $200 paid in interest?

C:  Pay only $85 per month until March, 2013, which by then will leave a balance of about $2,000, but I would receive a refund by that amount and it off the rest in full, and paid $370 in interest?

Some pros and cons to consider:

Option A is stable; there's no games or changes I need to make to online bill pay.  When I would receive the refund, I could invest it in CDs or something.
Option B would have the balance paid off the soonest and therefore less interest paid, but I'd be spending money I could save for emergencies.  Again, I could invest the refund.
Option C would create the most interest to be paid, but I'd be able to save money for rainy days.  No money to invest though except perhaps the money I'd save.

So, which option would be best for this situation and why?

bdancer222 · Accepted Answer

What refund?   Are you talking tax refund?  Go change your withholding now so that less comes out of your check every week.  You'll get a smaller refund but more each paycheck.  It's stupid to let the government have an interest free loan while you pay interest on credit cards.  A $2K refund translates to about $166 more per month.

And why do you think that 3.99% interest is for 5 years.  Credit cards are open, revolving accounts.  Intererest rates are subject to change and they do not have specific terms like an installment loan.  If you only pay the minimum payment, it is likely to take 10+ years to pay off the account.

It is likely that the interest on the credit card is higher than the interest you would receive on a savings account.  It would be smarter to pay off the credit card first, then save for an emergency.

Best plan is to pay off the credit card as quickly as possible.

Anonymous · Answer

B: Knock out the debt. In addition to the $375 take your full tax refund of this year and next year, and add it onto one of your monthly payments. You'll pay down the debt even faster and be out of debt sooner. 

Once you're out of debt, you're free to save that $375 every month. That 375 will then earn interest on savings. Build that up and you can pop it into a savings CD, MMA, or into the stock market. That will earn you even more money.

If you go with A, you'll pay more interest than necessary. Go with C and you'll be 100 by time you get it paid off. You're best bet is B plus include your tax refunds and any additional cash you get. The sooner you get it paid off, the better. And remember, don't use that card anymore (except for extreme emergencies when it's your absolutely last recourse of action.

Alex · Answer

Build an emergency fund in case of job loss, medical emergency or car accident.  Paying down credit card debt could leave you with an available amount to cover an emergency or the credit card could lower your limit.

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Credit Card Debt Payoff Scenario: Would like opinions?

3 Answers