I got a call from a close friend today. She and her husband have a lot of credit card debt piled up, and she's been taking advantage of the zero percent offers as she get them. She's got six cards at present, makes min payments of $750/mo total and that leaves them with no cushion after the bills are paid.
-- I'm not familiar with the payoff schedules of credit cards. If they are truly at zero percent, she makes the minimum payment, and she keeps transferring the balance to new cards, how long would it take to pay them off? Is it simply the balance divided by the payment = number of months to pay off?
-- She's concerned that the offers will stop and she'll be stuck with a high balance and having to pay a high credit card rate. So she wants to get an 8.6% home equity loan and pay off the cards. A 15 year loan would result in a monthly payment of approx $360/mo (approx 1/2 of what she now pays on the credit cards each month). She'd use the extra money to build up a small emergency fund, then she plans to make extra payments on the home equity loan to pay it off early.
- My gut tells me:
-- The credit card Russian Roulette thing is not a good long-term plan. These offers are getting more scarce. Getting the home equity loan and paying off the card is not a bad plan, even if 8.6% is a lot more than zero percent. Shop around for the best rate--credit union, etc.
-- With the "extra" cash each month, build up a modest emergency fund, then assure she's investing enough to get the full company match in the 401K available to them, then put all the extra toward paying off the principal on the HE loan.
-- Keep only one credit card, with a $1000 limit.
Most important: Before doing anything, be sure you are really going to commit to this. If the family is going to spend all the money each month, then stick with the zero interest credit cards--at least you'll be in a shallower hole.
Opinions sought!
-- I'm not familiar with the payoff schedules of credit cards. If they are truly at zero percent, she makes the minimum payment, and she keeps transferring the balance to new cards, how long would it take to pay them off? Is it simply the balance divided by the payment = number of months to pay off?
-- She's concerned that the offers will stop and she'll be stuck with a high balance and having to pay a high credit card rate. So she wants to get an 8.6% home equity loan and pay off the cards. A 15 year loan would result in a monthly payment of approx $360/mo (approx 1/2 of what she now pays on the credit cards each month). She'd use the extra money to build up a small emergency fund, then she plans to make extra payments on the home equity loan to pay it off early.
- My gut tells me:
-- The credit card Russian Roulette thing is not a good long-term plan. These offers are getting more scarce. Getting the home equity loan and paying off the card is not a bad plan, even if 8.6% is a lot more than zero percent. Shop around for the best rate--credit union, etc.
-- With the "extra" cash each month, build up a modest emergency fund, then assure she's investing enough to get the full company match in the 401K available to them, then put all the extra toward paying off the principal on the HE loan.
-- Keep only one credit card, with a $1000 limit.
Most important: Before doing anything, be sure you are really going to commit to this. If the family is going to spend all the money each month, then stick with the zero interest credit cards--at least you'll be in a shallower hole.
Opinions sought!