Friday

To pay off the credit card, car payment, or neither...

I have a dilemma and I'd like some feedback/suggestions as to what to do about it.

Here's the situation:

I have ~$7500 in debt to the credit mofos at 0% interest.
I am about to have $7500 on a car loan at ~10% interest.

Currently, I am saving my credit mofo money in a temporary EFund, but when the due date is up, I'll pay off the entire card. However, I question paying off the credit mofos when they're at 0% when I could be paying off the car loan at 10%.

What I'm wondering is if I should:

(1) Put the car loan (not signed off yet) onto a 0% credit card and keep switching to a new card (or even just a low interest card) until it's paid off?
- The benefit for this is at least three-fold. I would have the title to the car in hand, I wouldn't be paying any interest, and I wouldn't have to worry about loan paperwork. The downfall is obviously more credit card debt and the potential for not finding a 0% card(s) at any time in the future.

-OR-

(2) Get a car loan at 10% and pay it off with the CC EFund money (I will still be building up my reg EFund)?
- The benefit is that I wouldn't have to worry about finding a 0% interest rate card and I could prepay the loan off. The downfall is that I would be paying 10% interest, it would take longer to pay off the debt, and I wouldn't have that extra money in hand (or a temp EFund) should I need it.

(3) My brain just went kaput because I had another possibility that I can't remember.

I am leaning towards option 1, but I am not so sure. What would y'all do?

Clink

26 comments:

D said...

Clink, this decision is personal. Plus it all depends on you.

1. Will you need stellar credit in this time period for a home purchase? Or other investment? If so, maybe no.

2. Can you stay on top of it? Paying on time is crucial, losing that 0% could tip you the other way. Are you geared up to prevent this?

3. Are you prepared for this decision? I personally go crazy "knowing" I have credit card debt. Making it difficult to fully enjoy the savings.

In the end, I would not use the E-Fund to pay on the car. Only because the creditcards not being paid at the end of 0% time frame, pose a larger threat to your wealth, with higher interest.

What I would do, is take all monies earned on the E-fund above the cc debt and pay extra on my car loan.

Do what works for you. Emotions are a large part of our success.

Clink said...

D! Good to see you here.

1. I do not need stellar credit right now, only good enough to get 0% interest cards.

2. I do have a problem with paying on time, but after I automated everything, it's been no problem at all!

3. I know what you're saying on this, but I have a problem with debt in general, so I'd rather be earning 0% on the debt.

Thanks for the comment!

Miguel said...

Wow, You really are playing CC arbitrage. I didn't realize you had the cash sitting in an acct.

I have to agree with d. The risk of #1 is too great - this is exactly how people get in over their heads. Here's the problem - the CC rate is short-term: The car payment obligation is long-term. If, for some unforseen reason, you cannot continue to role the CC debt over at 0%, you might get stuck at a very high rate, which could make it impossible for you to dig your way out. Also, you'll be tempted to only make min. pmts on the CC.

Maybe #3 was shop around for a car loan at less than 10% - ex. does your new job have a credit union. Or maybe you'll be able to refinance the car loan at less than 10% sometime in the future, once you're into your new high-income job.

Clink said...

@ Miguel - I don't have the money in a fund yet, this would be money that I would be saving up while paying the minimums to the credit mofos, allowing me to build up a small, temp efund (while I'm building up a real efund) until I pay it all to the cards.

I agree regarding the risk. That's what my gf said as well.

I hadn't thought about shopping around for a loan (I'm slow, I know). I just went to lending tree. I guess going to my bank would be an option (d'uh!). My new job doesn't have a credit union (small company). That sounds like a better idea.

Debt Hater said...

This is a tough one... either way, you're going to have to keep rolling over the debt. The 0% on the cc isn't going to last forever, so it will have to be rolled to a lower interest card too.
Ok, this is what I think I'd do. I'd pay off the car loan first, making the minimums on the cc. Then concentrate on the cc. It's the same concept as if both were credit cards. Since the balances are the same, you want to get rid of the one with the higher rate first. You'll save money in interest that way.
You could get a new loan with a lower rate too, but just think of it as a cc (and 10% isn't so bad in that case... if you pay it off quick!).

Clink said...

DH - I really like your soln. And you are right, 10% isn't *so* bad - it was good to have that in perspective.

Kristofer said...

I'm going to have to agree with option 2. it's cool that you got the money from the credir card company but it's not worth the risk. at the very worst following option 2, your credit will look better. at the very worst with option 1, you could ruin your financial future.

Dea Felis said...

I agree with kristofer. Making minimum payments on a credit card is bad juju. However, making minimum payments on a car once in a while, while you make larger payments most of the time, actually pays off faster than you might expect. Also, do shop around for other loans, and do the math to see if a low-payment, longer-length loan might be right for you. How it worked for me was that I could make huge over-payments most of the time, but only pay the small payment on tight months. The car was mine much faster than I expected it to be, and I built up my credit history in the process.

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