debt

Pay off truck, or credit card debt?

Steve Bucciq_v2.gifDear Debt Adviser,
I'm trying to get some of my debt paid off but my wife and I have a difference of opinion on what should be paid off first.

I have a truck payment of $615 a month. I have about 13 more payments left with an annual percentage rate of 7 percent. For some dumb reason, I financed my truck for six years. I also have a credit card with a balance transfer of about $8,800 at an introductory rate of zero percent through August 2009. After the intro rate, the APR will be around 7 percent.

I feel that I should try and pay the truck off first, then use the extra $615 and put it toward my credit card. My wife thinks I should try and pay my credit card off first, then worry about my truck.

What is the best way to handle my debt?
-- Josh

a_v2.gifDear Josh,
Not the classic truck/wife debacle! This battle of the sexes takes its place in the annals of great classic American struggles, such as when Ralphie from the movie "A Christmas Story" tried to convince his mother that a "Red Ryder, carbine action, 200-shot range model air rifle" wouldn't shoot his eye out.

Your logical approach may work, but I want you to be aware of some possible disasters lurking just under the surface. Let me give you some new information before letting you take it from there.

It will take you more than two years to get your truck and credit cards paid off. As all but the most youthful of us know, stuff happens along the way -- especially over the course of two years.

For instance, your zero percent credit card interest rate may not be as guaranteed as you think.

Your card issuer may raise rates if your account now represents a greater risk than it did originally. You could trigger a rate increase simply by opening new credit, ending up with a late payment to another creditor (even if it's a mail delay and not your fault) or significantly increase a balance on another credit card.

Even if you change nothing, the world may change. For example, the current credit crunch could cause the lender to decide that it is not getting compensated sufficiently for the perceived risk in your account. Many credit card agreements would allow for a rate increase under these circumstances.

Making payments on time, as agreed, is no longer a guarantee that your rate will not change. According to the Consumer Action 2008 Credit Card Survey, 77 percent of card issuers answered "yes" to the question, "Can you increase my APR or change my terms 'any time for any reason'?"

This means your zero percent introductory rate could change to a much higher rate at any time depending on the fine print in your credit card agreement. I suggest you get a magnifying glass and check out all the small print in your card agreement.

Another "oops" most people don't know about until they experience it is that if you use your credit card with the zero percent rate for any new purchases, the interest rate for those purchases will be higher.

How can this be? Well, most agreements apply payments to the lowest interest rate balance first. So any payments you make will be applied to the $8,800 balance transfer first until you pay off the entire debt you owe. Meanwhile, new purchases will ring up monthly interest charges at 18 percent to 20 percent.

Lastly, many people believe that once a loan is paid off they will be able to apply the payment amount to another debt obligation. My experience is that by the time the loan is paid off, something in your life will have changed and that monthly truck payment will be needed to buy diapers, pay for a dental crown or plug a hole somewhere else in your monthly budget.

In other words, despite your best intentions, it won't be applied toward the credit card debt.

The bottom line is that in a world of instability and surprises, your truck rate is more stable than your credit card rate. So, I suggest you make a concerted effort to pay off your credit card balance as soon as possible.

That way, no matter what happens in two years, you won't end up having shot your eye out!

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