Credit Card Rule Rate Question (Full Version)

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Galilee -> Credit Card Rule Rate Question (6/9/2009 11:36:02 AM)

I understand that one of the new rules that Obama put in place is that anything over the minimum payment must be put to the balance with the highest interest rate first.

Does anyone know when that takes effect? Is it August 20, 2009, November 22, 2009, Februray 16, 2010, February 22nd, 2010, July 10th, 2010, or some other date?

I have seen all of these dates thrown around for different rule changes.

The reason I ask is that, believe it or not, if it happens sooner than later, it will hurt me more than it helps me, at least for 1 card, and I need to change something before that happens. If it happens next July, it's irrelevant.

Does anyone know for sure, and have the documentation to back it up?

Thanks.



Galilee -> RE: Credit Card Rule Rate Question (6/9/2009 12:23:41 PM)

Actually, I jsut got an e-mail back from a person who wrote an article in the Denver Post who said it takes place in "Late February".

I guess I have some work to do.



Coffee_Drinker -> RE: Credit Card Rule Rate Question (6/9/2009 3:07:49 PM)

I'm almost 103.5% positive that there'll be a loophole in there somewhere. [8D]



Galilee -> RE: Credit Card Rule Rate Question (6/9/2009 3:41:39 PM)

Here is the bizaar thing. I have a card with 2 balance transfers on it that are for the life of the balance. One at 6%, one at 4%. I had a lot of room, but of course, they pay off the lowest interest rate thing first, so if I transferred anything at a higher rate that was a temporary rate, it would never get paid off until the other ones were paid off first, so I never did it.

Then I got an offer for 3% on the same card for 12 months. I had one of our business cards that jacked up from 8% to 35% (not late paments, no issues, just greed). The balance was only $4,000, so I moved it to this card at 3%, figuring that it was the lowest interest rate onthe card, so it would get paid off first. I would have a year to pay it off, and meanwhile, the other transfers (which are locked in for likfe) will stay there.

But now, when they change the rules, the 6% will be paid off first, and in a year the 3% will jump to the standard rate. So, I need to get the $4,000 paid off by February now, instead of until July like I planned.



writerchick -> RE: Credit Card Rule Rate Question (6/9/2009 4:15:52 PM)

Having never read the new law, what you're worried about doesn't seem likely at all.

Unless you're paying all of your creditors through an intermediary, there is no way they can transfer funds paid to one creditor to another creditor simply because that rate is higher.

It sounds more likely that the law is going to affect how your balance is paid down on one account.

If you do cash advances and credit purchases on the same card, the cash advances would have the higher interest rate. Under the current rules, the only way to get rid of the cash advance is to pay off the whole balance. Except, if you needed a cash advance in the first place, chances are, you're not going to be able to pay off the card anytime soon.

The company can apply your payment only to the lower interest credit purchase and keep the higher interest cash advance active and accumulating for as long as possible which puts you deeper in debt. The law would change this practice so you can pay off the cash advance first and get out of debt sooner.

That's my take on things.

It would be an impossible administrative nightmare to try to regulate higher interest rates on accounts between banks.



informationguy -> RE: Credit Card Rule Rate Question (6/9/2009 4:22:48 PM)

July 2010 is the deadline date for all the changes to take effect. I like you am not sure about when the exact date is for what you are looking into.

http://www.creditcards.com/credit-card-news/obama-signs-credit-card-law-1282.php?aid=ff3b74cd



Galilee -> RE: Credit Card Rule Rate Question (6/9/2009 5:31:33 PM)

quote:

ORIGINAL: writerchick

Having never read the new law, what you're worried about doesn't seem likely at all.

Unless you're paying all of your creditors through an intermediary, there is no way they can transfer funds paid to one creditor to another creditor simply because that rate is higher.

It sounds more likely that the law is going to affect how your balance is paid down on one account.

If you do cash advances and credit purchases on the same card, the cash advances would have the higher interest rate. Under the current rules, the only way to get rid of the cash advance is to pay off the whole balance. Except, if you needed a cash advance in the first place, chances are, you're not going to be able to pay off the card anytime soon.

The company can apply your payment only to the lower interest credit purchase and keep the higher interest cash advance active and accumulating for as long as possible which puts you deeper in debt. The law would change this practice so you can pay off the cash advance first and get out of debt sooner.

That's my take on things.

It would be an impossible administrative nightmare to try to regulate higher interest rates on accounts between banks.


I'm probably making this more complicated than it needs to be.

It's the same card with 3 different transfers on it.

Transfer A is locked in for life at 6% until it is paid off.
Transfer B is locked in for life at 4% until it is paid off.
Transfer C is locked in at 2.99% until July 2010, at which point any unpaid balance goes to the standard rate (18%, I'm not sure).

I took the offer because the way the law is written now is that the lowest interest rate gets paid off first. That way I have until July of next year to pay it off, because everything I pay goes toward that balance.

BUT...with the law change, suddendly the amounts I pay goes toward the 6% transfer, and the 2.99% remains unpaid. THEN, in July of next year, my 2.99% balance, which has not been paid down, jumps up to 18%. So, if the February date is correct (and I beleive it is), I need to pay off the $4,000 before then or the remaining balance will jump to the 18%, which I don't want to have happen.



blessedinnyc -> RE: Credit Card Rule Rate Question (6/9/2009 6:39:51 PM)

quote:

ORIGINAL: Galilee
BUT...with the law change, suddendly the amounts I pay goes toward the 6% transfer, and the 2.99% remains unpaid. THEN, in July of next year, my 2.99% balance, which has not been paid down, jumps up to 18%. So, if the February date is correct (and I beleive it is), I need to pay off the $4,000 before then or the remaining balance will jump to the 18%, which I don't want to have happen.

I don't think it's that bad.

If you can't pay everything off in full, take the extra money and save it in a CD or savings account yielding 2%. Set the CDs to mature in July 2010. Then, pay down the balance the day after your rate resets. You give up 1% in interest over the year but make it back in the first month after the rate resets.

And you only have to worry about this weird situation for four months. And I would be ecstatic to be able to get a 6% risk-free return on my money right now (by being able to pay down debt.)

The real question is what's your highest interest rate right now that doesn't get paid off at the end of the month? If it's above 13-14% and you can pay off the 2.99% in less than a year, I think it would be helpful for you to set your sights on that and then worry about the 18% rate when the time comes. Better to be paying 3% one year and 18% the next than to be paying 14% for two years.



peace77 -> RE: Credit Card Rule Rate Question (6/10/2009 10:17:00 PM)

Don't stress about it.
Just pay as much as you can towards paying off the card.
Just before the introductory rate runs out do a balance transfer to a different card.

(There is no point in putting money in a CD earning 2% when the credit card company is charging you more than that.)

Do keep your emergency fund and don't use it to pay down the credit card.


Peace,
Anne



blessedinnyc -> RE: Credit Card Rule Rate Question (6/11/2009 1:12:07 PM)

quote:

ORIGINAL: peace77
(There is no point in putting money in a CD earning 2% when the credit card company is charging you more than that.)

Remember that there's caveats to this situation. She can't pay down the 2.99% debt directly. She has to eat through the 4% and 6% PERMANENT debt first. She loses literally 1/4% by putting it in CD for three months from April to July and gains 0.6% in the first month by paying off the 13% debt rather than the 6% debt.

The same rule would work for smaller amounts, too. The only assumption is that she can't pay off a majority of her total debt on this card by the time the rate reset hits.

I'd love to be able to borrow at 4% with a call feature at par right now.



GroupW -> RE: Credit Card Rule Rate Question (6/11/2009 5:51:44 PM)

Interesting! Had to write a little quick & dirty spreadsheet to figure that one out.

If I assume that transfers 1,2,and 3 are of roughly equal size (let's say $4 thousand each), and if I further assume that you have $350 or so per month to pay down the debt, it looks to me like you're significantly better off to figure out what you need to save each month to pay off that final transfer amount on July 31 2010 & contributing that amount to savings.

Assuming:
-you had $350 per month to put toward debt reduction,
-paid to savings about $285 per month, and
-paid the remaining 65 to transfer #1 until paid off
-then paid the $65 to pay down transfer #2,
-and then finally using the amount built up in your savings account to pay off transfer #3 on July 31 of 2010
- also assuming transfer #3 resets to an 18% rate....

Then:
You're roughly $400 bucks ahead in net present value terms using an 8% rate of return on your investing dollars.

Your interest payments would be about $1300 over the life of the debt if you just let the credit card company allocate the dollars according to the new law. If you did the savings game and saved up the money to pay down transfer #3 at 7/31/2010, then you're total interest payments would be about $750.

An interesting and counterintuitive result, eh? Not very often someone can be better off putting money in a savings account and NOT paying down debt immediately.

Thanks for the fun little brain teaser.

BT



peace77 -> RE: Credit Card Rule Rate Question (6/11/2009 10:21:47 PM)

quote:

using an 8% rate of return on your investing dollars.


The problem with that figuring is that you're not going to get more than about 2% on a 3 month CD in today's market.

You may save a few cents in the short term. But, in the long term, the entire debt needs to be paid off.



Peace,
Anne



GroupW -> RE: Credit Card Rule Rate Question (6/11/2009 10:26:11 PM)

I assumed you would earn no more than 2% over period on the savings. The 8% is just the discount rate I picked to calculate the net present value (i.e. what the interest rate savings that you get over time is worth if someone would come in and just write you a check for it today.)

You could earn zero on the savings and it would still pay you.

Edit: All it's really doing is figuring out how to pay down the most expensive debt the fastest. Two ways you can pay down debt - straight contribution of cash to the creditor, or building up an offsetting asset (also known as defeasance.) By building up the cash savings to the point where the amount is sufficient to pay the third transfer (the most expensive debt) on the date the rate resets, you keep the low interest debt in place.

Agreed. Sooner or later though, the debt has to be repaid. This kind of strategy works for the very disciplined. I wouldn't recommend it for someone who has issues with saving & spending.

In this example, the savings is more than "a few cents". It could be several hundred dollars. Not peanuts if you're trying to live on modest means.



Random -> RE: Credit Card Rule Rate Question (6/12/2009 6:04:32 AM)

quote:

ORIGINAL: GroupW

or building up an offsetting asset (also known as defeasance.




Which also eliminates the issue of the credit line being lowered as you pay it down, leaving you no cushion.



GroupW -> RE: Credit Card Rule Rate Question (6/12/2009 8:35:56 AM)

Not really - instead of unused credit line, you have a cash cushion. In this case, the two work out to be essentially the same except that you're $400 ahead of the game at the end.



Random -> RE: Credit Card Rule Rate Question (6/12/2009 11:18:01 AM)

quote:

ORIGINAL: GroupW

Not really - instead of unused credit line, you have a cash cushion. In this case, the two work out to be essentially the same except that you're $400 ahead of the game at the end.


That's my point. If you pay down the line, and then they lower the limit, you have no cushion -- no available credit and no cash. If instead of paying it down, you keep the cash until you can pay the whole thing off (the way you describe), you still have no available limit, but you have cash should an emergency occur.



GroupW -> RE: Credit Card Rule Rate Question (6/12/2009 2:40:15 PM)

I get it. Misunderstood the first time around.



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