A reader has a complicated relationship with her ex and her credit cards.
Question: I just inherited some money from my grandmother — $9,000 to be exact. That shouldn’t stress me out, but it does. What do I do with it?
I know what to do first, thanks to reading Debt.com and some other websites. So I paid off $3,000 I was carrying on my personal credit cards. That saves me a lot in interest and leaves me with $6,000. Now all that’s left is:
- $5,000 on my $10,000 car loan, at $500 a month
- $7,500 in collections, from a business Visa card.
What’s in collections is from a failed business partnership with my slimy ex-boyfriend. (Like a dummy, I put everything in my name on a business Visa card.) I originally owed more than $13,000 but begged and pleaded to get that down to $7,500, which I need to start paying $1,000 a month starting in March.
I’m wondering: Is it better to just pay off my car loan and use that extra $500 per month to to pay off that credit card bill? Or should I try to pay the AmEx off faster because it’s a delinquency being reported on my credit?
—Nicole in Wisconsin
Howard Dvorkin CPA answers…
Sometimes, complicated questions have simple answers. This is one of those times, Nicole.
Take the cash and try to settle the Visa business card.
Why? Because card issuers are often willing to negotiate. How much depends on many factors, but if they can get some money now, that can trump more money later.
Call your issuer and offer an immediate $2,500 to settle the entire balance of $7,500 — and see what they come back with. If you can save thousands later by paying hundreds more now, that’s a great deal.
Here’s where it get complicated
What if your issuer refuses to negotiate on the remaining balance? Then you need to learn the answer to this question…
Is your account being assessed interest?
You have what’s called a charged-off account, Nicole. Typically, those aren’t assessed interest. If that’s true here, then pay off your car. Why? Because you’ll save the remaining interest on your car loan. That’s money in your pocket, not the lender’s.
However, if your card issuer is indeed charging you interest, then apply your lump sum to the outstanding balance — even if your issuer refuses to discount the remaining balance.
That’s because of the way interest works in car loans versus credit cards. For car loans, much like mortgages, your earliest payments are mostly interest instead of principal. (There’s a name for this kind of loan, called the Rule of 78s.)
Thus, applying your lump sum to the remaining balance on your car loan won’t save you much in interest as it would on an interest-charging business card balance in collections.
So that’s the short and simple, as well as the long and complex. Good luck, Nicole. Tell me what happens.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.