April 7,2009
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News: Credit-Card Leveraging.
A person wrote in with a perplexing question recently with an interesting credit card question. He owes $24,000 on one credit card that has split APRs. Half of the debt ($12,000) is charging a 0.99% APR for a year while the other half is charged at a 6.99% APR. However, the 6.99% half is being hiked to 10.99%. Should the man just accept the change or opt-out? First, the answer would largely depend on the payment plan. Many of these situations will not allow paying on the larger interest until all of the lower-interest portions are paid in full. In this case it comes down to how fast the high-interest portion can be paid in full. If it's quick, then keeping the credit card account open may be the best plan. Same goes for the ability to pay on the high interest portion first. But, if the payment is to be drawn out, things change.
If only paying the minimum of 4% each month, the difference between the 6.99% account and the hike to 10.99 would in over 13 years worth of payments with the difference total finance charges being about $1,500. Jumping the monthly payments up to 10% would cut things drastically. Now, it would only take 6 months to pay it off would only take 6 years and would only result in a $686 difference caused by the rate jump.
Obviously, paying off the 10.99% APR balance quickly and, then enjoying the benefits of the 0.99% APR on the remaining $12,000 is the best deal, if you can get it. That $12,000 worth of cash could be invested in a 5.25% one-year CD at CFR (407-268-5000) for a year and yield an extra $550. Then, when the promo ends, cash in the CD, pay off the credit card and have an extra $550 left over. That's a good deal.