Help--Hair on fire credit card pay down

[jkitiara]

I have been mustachian for a while--getting pretty badass, actually. Part of factoring in early retirement for myself is making sure my own parents are fairly well set up and won't become dependent on my husband and myself. In that spirit, my mom has finally let me see her finances and help her sort them out.
So here is a math story problem for the forums to help with:

$8000 in cc debt, currently at 29% (!)

I would like to do a balance transfer to stop paying that ridiculous fee. She has one other card at 14%, and we are going to accept another offer for a card with a 0% intro APR for 9 months (her credit is not great, so she can't qualify for much better).

Both have a 3% transfer fee. After the 9 month intro rate, the new card bounces up to 25%.

She can afford to put about $300 a month towards this debt. Any extra income will of course go towards it, but I don't want to count on it.

My question is, how much should go on the 0% and how much on 14%? I don't necessarily want to move it all to the 0 because it won't be paid off in 9 months, when the APR will jump much higher. I don't want to have to move it more than once, because that just adds fees.

I was thinking half and half, but I'd like to hear from some Fellow Mustachians first!

[gimp]

What's her credit score and history like? Has she been making the payments?

Here's what I'd do:

1. Dump it all onto the 0% card.
2. Cut up the 29% card, and use the 14% card only for emergencies. If she can't keep to that, cut it up too.
3. Pay it off aggressively.
4. Use the 9-month reprieve to find a way to consolidate your loans. Hopefully you might find something at 8-10%, or even better. Not a credit card, but more of a ... bank loan. Nine months, assuming credit score is at least somewhat decent, should be enough to find a workable solution.

Balance transfer will cost you $240. That pays for itself in less than two months!

Keep those credit cards cut up, seriously. Being able to put $300 a month towards this debt means she pretty much borrowed as much money as she possibly could to afford the minimum payment. That smacks of poor management, and poor management means cash-only.

And when I say "pay off aggressively" I mean - cancel tv, don't go out to eat, don't buy liquor, don't buy fancy food, don't buy clothes if they're not absolutely necessary, get rid of any expensive phone plans, don't drive too much... she can't afford it. Cut all expenses that aren't absolutely necessary.

[greenmimama]

What's her credit score and history like? Has she been making the payments?

Here's what I'd do:

1. Dump it all onto the 0% card.
2. Cut up the 29% card, and use the 14% card only for emergencies. If she can't keep to that, cut it up too.
3. Pay it off aggressively.
4. Use the 9-month reprieve to find a way to consolidate your loans. Hopefully you might find something at 8-10%, or even better. Not a credit card, but more of a ... bank loan. Nine months, assuming credit score is at least somewhat decent, should be enough to find a workable solution.

Balance transfer will cost you $240. That pays for itself in less than two months!

Keep those credit cards cut up, seriously. Being able to put $300 a month towards this debt means she pretty much borrowed as much money as she possibly could to afford the minimum payment. That smacks of poor management, and poor management means cash-only.

And when I say "pay off aggressively" I mean - cancel tv, don't go out to eat, don't buy liquor, don't buy fancy food, don't buy clothes if they're not absolutely necessary, get rid of any expensive phone plans, don't drive too much... she can't afford it. Cut all expenses that aren't absolutely necessary.

Agree, does she have anything of value to sell, anything at all? even a few things that might be worth a few hundred each? Make her really think :) Can you help her have a garage sale and maybe donate some things, better than giving her money but you are helping her out.

I would make a list of what you think id feasible to pay off in that 9 months and then maybe put a bit more than that onto the card as a motivator to pay it off in full while it's still at 0%

[horsepoor]

If she can really only afford $300 total debt repayment each month, I'd call the 14% credit card company and find out what the minimum payment would be for a few different balances ($4K, 5K, 6K...), because that minimum will cut into her repayment on the 0% card.  If for example, it's $50 minimum, that leaves $250 per month towards the 0% card for 9 months - $2,250 that she can repay. It may take some fiddling to find the balance point with the payoff on the 0% while handling the minimums on the other card. Since the APR goes so high after the 9 months, I wouldn't put any more on there than she can pay off in the 9 months.  The rest should go on the 14% card unless it's possible to find another, better intro APR card.  Some cards will do like 1.9% promo APR for a longer time than what's offered at 0%.  It sounds like she is stretched too thin to try to juggle more than two card balances though.

Don't forget to add in the balance transfer fee as part of the total balance when doing your calculations.

+100 on seeing if you can help her sell some stuff, especially if she can do it quickly and pay off some of her current balance now to avoid the balance transfer fee.

Good luck!

[YoungInvestor]

I'd try to put everything on the 0% and find another similar offer in the meantime. Paying 3% every 6 months is fairly decent. Much better than paying 14% annual on anything.

EDIT:

To be clear, you're getting a better deal regardless of whether or not you find another 0% deal. Even if you transfer your entire remaining balance 1.03*(8000*1.03- 9*300) = 1.03*(8240-2700)=5706.20$ to the 14% card, there is no situation in which you will have a lower balance at the end of the 9 months (Including the 3% for the second transfer).


What I would do is quite simple : Put everything you can in a savings account. There are some out there that are higher rate, but let's use 1.2% annual (0.1% monthly). Pay the minimum amount each month, and store the rest away in that savings account.

As an example, let's say the minimum payment is 100$/ month and you store 200$/ month:After 9 months, your balance is 1.03*(8240 - 900 - 200 * (1.001^9-1)/0.001) = 5698.76$ It's up to you to decide if the hassle is worth the 7.44$ difference. It probably is if you already have a savings account, as it would only take an additional couple of seconds every month, paying you hundreds per hour of additional work.

EDIT 2 :

Make sure she can actually have 1800$ in a savings account and not spend it beforehand, though.

[jkitiara]

Wow, thanks for all the great responses everyone!

One thing I forgot to factor in was her poor credit. There have been a lot of late payments and a few threatening letters from creditors (we are working on that too!) We went ahead and applied online for the 0% card she had been pre approved for and she got a $3000 credit limit. So that makes that decision for us.

$3000 on 0%, $5000 on 14%

She will then aggressively pay down the higher APR card and just do the minimum on the 0. Then we will have to roll over the balance on the 0 when it is up (unless they get a chunk of money by selling something), which it sounds like the math works out to pay the fee even twice.

At least this will stop the bloodletting that is 29% on a $8000!!! Makes me sad, like I wasn't taking care of my parents :( My mom was the one who decided she should pay the 14% off first yesterday, so I think it has finally hit brain what a big deal this is. She was in denial before.

My dad is actively trying to sell his lumber truck and some other things. They both know that money has to be earmarked for this debt.

[neo von retorch]

Do either of you qualify for a credit union? While poor credit may play a role... at my credit union, the credit line has a 2.9% APR for balance transfers for ~18 months, and there is NO balance transfer fee. That'd certainly beat the 14% if you can get such an option.

[nereo]

A different approach:
Could you simply pay down your parents cc debt in one (or two or three) simple payments, and then work out a contract where they repay you over the next 1-2 years?  Include a reasonable interest rate if you like - say 3% - 5%, and everyone comes out ahead (except the cc companies, which like to suck the life out of people).
It would mean you'd have to trust your parents would pay you back, but to me that seems simpler than tranfering from one card to another and paying transfer fees, etc. etc.

[gimp]

OP: Your mother is an adult; it's not your responsibility to check that she's not buying a bunch of shit she can't afford.

Nereo: I like your idea, but I didn't recommend it because often that turns into a black hole of money and hurt feelings. Yes, it is likely the optimal solution if everyone can be trusted to keep their sides of the bargain.

[nereo]

OP: Your mother is an adult; it's not your responsibility to check that she's not buying a bunch of shit she can't afford.

Nereo: I like your idea, but I didn't recommend it because often that turns into a black hole of money and hurt feelings. Yes, it is likely the optimal solution if everyone can be trusted to keep their sides of the bargain.

I suggested it because the OP is already taking an active roll in her parents finances, and has made this part of his/her strategy for FI.  I agree that helping pay off family members' debts is an often tricky action, but since they are already going down this road... I'd consider it an option.

That said you highlighted a bigger worry that I have - how can the OP make sure that his/her parents don't immediately fall into the trap of debt again?  That is a harder nut to crack.

[horsepoor]

So that makes that decision for us.

$3000 on 0%, $5000 on 14%

I'm not sure that using the full 3K will be optimal, because she won't be able to pay it off within the 9 months.  Also, I wouldn't max it because I wouldn't put it past a CC company to process the transfer, add the 3% transfer fee, then slap her with an over the limit fee.  Safer to keep it a little under the limit.

[YoungInvestor]

So that makes that decision for us.

$3000 on 0%, $5000 on 14%

I'm not sure that using the full 3K will be optimal, because she won't be able to pay it off within the 9 months.  Also, I wouldn't max it because I wouldn't put it past a CC company to process the transfer, add the 3% transfer fee, then slap her with an over the limit fee.  Safer to keep it a little under the limit.

Doesn't matter, she'll be paying 3% to transfer stuff she'd have paid about 7% on otherwise.

She should definitely make sure that she can actually put the full 3k on it without additional fees, though.

[jkitiara]

A different approach:
Could you simply pay down your parents cc debt in one (or two or three) simple payments, and then work out a contract where they repay you over the next 1-2 years?  Include a reasonable interest rate if you like - say 3% - 5%, and everyone comes out ahead (except the cc companies, which like to suck the life out of people).
It would mean you'd have to trust your parents would pay you back, but to me that seems simpler than tranfering from one card to another and paying transfer fees, etc. etc.

Although my parents are letting me sift through their finances to help them optimize things, they are nowhere near adopting a mustachian lifestyle. They could make plenty of cutbacks to pay this off faster, but claim they "need" cable, an extra truck, sodas every day, etc. Thus, I won't be paying off any of this with my own money, no matter what they might promise to pay back. Also, I have generally noted in life that bailouts don't help anyone fix the root of the problem (hear me US govt?)

I'm not sure that using the full 3K will be optimal, because she won't be able to pay it off within the 9 months.  Also, I wouldn't max it because I wouldn't put it past a CC company to process the transfer, add the 3% transfer fee, then slap her with an over the limit fee.  Safer to keep it a little under the limit.

Thank you for reminding me to factor in the 3%! I was planning to keep it just under the limit anyways. I'm thinking 2800 + 3% = 2884 should do it.

I hope that once I sort this out they won't fall into a debt trap again soon. They weren't like this when I was growing up (although they've never been awesome with money). This all happened in the last five years. And although they aren't willing to change their lifestyle significantly, I do see it sinking in how painful it is that they're racked up all these interest charges. There is definitely some depression involved here.