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So my Dad and I were discussing credit card stuff (he's in the business). He made a very important point which I haven't heard discussed much. So here's my public service announcement:
The credit card company will pay off your lowest interest balance first with the money you send in. This is guaranteed to cost you money. The amount depends on your balance and percentages.
An example. Suppose Mr. Micah and I had $5000 of debt at 30% APR. Now, we called the company and they agreed to lower our APR to 13%. But this APR would only count towards new purchases (they don't always say this part, so be sure to check with them. it's hidden in the fine print). Now we go out and spend $1500 on a couch. Dining room set? Flat screen tv? I can't imagine spending $1500 for anything but an entire month's expenses, so this is a stretch.
We send in $250 to start our debt snowball. The $250 will be applied to our $1500 purchase, not our $5000 of old debt. So the $5000 will continue to accumulate interest at the old rate.
If we pay off $250 every month, we'll eventually pay off the whole thing. But we will have paid more money total (because of the higher APR) than if we'd gotten them to apply our payments to the balance with the higher APR. In this case, $369 more would go to the CC company.
So find out how your CC company will let you pay off the higher-interest balance first. Maybe it's as simple as writing on the check line, "apply to higher-interest debt." But call them. Don't assume. A simple call to their service people should help you find out the exact protocals of your company.
Even if the service people annoy you, do it. Avoiding this call will cost you in the long run (especially if you always carry a balance, since it's guaranteed to be at the higher rate!). Make the call today.
(note, here's a link to the spreadsheet I used for my calculations. 30% APY means 2.5% per month. 13% means 1.08% per month. We assume that you begin with sending in $250 right away. Good job! Please let me know if you have any methodology questions.)
