Paying off debt

[pooh.kim]

We are looking at two debts here and I keep going back and forth with which to pay off. The amounts are almost the same.
1. DVC loan
2. CC debt

I really want to pay the CC so that I can say I have NO credit card debt. However, the interest on the CC is 2.9% till paid and the DVC loan is 9.9% (with 9 1/2 yrs left unless pd early)

Any suggestions or reasons why one would be better to pay off first.
Thanks in advance

We are hoping to plan a 2006 cruise and would like to have finances in check before then.

 

[HenDuck]

Do you mind telling us the totals on the two debts?

 

[Dagny]

If the amounts owed are about the same, pay the debt with the higher interest first (ie the DVC loan). The difference between 2.9 and 9.9 is huge over the long haul. you can run a comparison quicken.com (and other websites) to see the interest difference. Just my opinion

 

[DiznEeyore]

I agree w/Dagny. The DVC loan rate is almost 4 times your CC rate -- you'll save a ton more money paying that off first (as long as you don't charge anything more on your CC, of course ).

 

[LoriZH]

I think if you have enough to pay of DVC, go for it! Crazy to keep that interest rate when you clearly will save a whole lot more by paying it off.

Saying you have no cc debt is no big deal when you are saving a ton of cash paying off another loan.

Good luck!

 

[EsmeraldaX]

I agree with the others. Pay off the DVC. The difference between the interest rates is a lot and I think you'll be better off paying that first.

I know it's nice to say you have no cc debt. But having manageable cc debt is not the end of the world, and it will be paid down eventually. Just don't use the cc for anything else in the meantime. In fact, lock the cc away somewhere so you are not even tempted to use it.

That's what I do. I only keep the cc's I have for absolute emergencies.

 

[DWatWDW]

I disagree with the others. Pay off the CC debt first. The DVC is a mortgage, so the interest is tax deductable. It is also a locked interest rate. CC companies will give the low rate, but usually it is an introductory rate and has a lot of caveats. I would hate to pay off a 10% DVC loan, then have a CC payment get lost in the mail, or over limit, or fraud checked, or whatever, and see that jacked up to 20-25 % when it could have been payed off.

 

[sperk99]

I would pay off the DVC loan b/c of the higher rate. However, do you have any home equity. The reason here is that you can possibly pay off both and then write off the interest in your taxes. That is what I did for some loans that I have. I not only lowered the interest rate on the loans, but I am now writing off that interest on my tax return!

Credit card debt isn't soo bad as long as you don't add ot it and make timely payments...

If the home equity is not an option, just pay off the higher interest loan. That would make the most sense to me.

 

[crisi]

Originally posted by DWatWDW
I disagree with the others. Pay off the CC debt first. The DVC is a mortgage, so the interest is tax deductable. It is also a locked interest rate. CC companies will give the low rate, but usually it is an introductory rate and has a lot of caveats. I would hate to pay off a 10% DVC loan, then have a CC payment get lost in the mail, or over limit, or fraud checked, or whatever, and see that jacked up to 20-25 % when it could have been payed off.

That is my thought as well. If the 2.2 rate is going to change in a year to 22%, you want to get that paid off now - unless you are going to be able to get both paid off before the CC rate increases.

 

[robsmom]

Is DVC really considered a mortgage for tax purposes? Cool if it is. If so you need to calculate the tax benefit of deducting the interest versus the lower interest rate of 2.2. Assuming the that the 2.2% cc debt is always going to stay 2.2% and your tax braket is 33%, this means that you will save 1/3 of the interest paid on DVC via the mortage deduction. This is still not enough tax savings to justify not paying off a 2.2% loan 1st.

 

[rapriebe]

Without a doubt, payoff the higher interest item first. You stated that the 2.9% is for the life of the balance so pay off the higher one first. You can use the payment that you were making on the DVC and add it to the current payment for the credit card. That will help bring the balance down quicker also.

 

[disneyatl]

According to Clark Howard you should always pay off the loan with the highest interest first. Put all extra money towards the higher interest loan.

 

[ksoehrlein]

Originally posted by robsmom
Is DVC really considered a mortgage for tax purposes?

Not according to our accountant, unfortunately. As a result, we opted to "finance" DVC on one of our credit cards that was offering convenience checks at 4.5% for the life of the loan rather than paying Disney's much higher interest rate. Even better, we just did a balance transfer to a different credit card -- 1.99% for the life of the loan with no transaction fee!

 

[heathrow42]

I agree with DWatWDW here.. you should probably pay off the c.c. debt first. DWatWDW is right about the introductory rate of 2.9 probably being temporary.. and that is something you should be able to check out.*

But further to that is your credit score.. I believe mortgage debt is calculated differently then credit card debt. So, any prolonged credit card debt you have could make your credit score worse. You might also want to find out how credit scores are calculated (howstuffworks.com) and that may help you decide.

You really, really might want to check out Motley Fool, Suze Orman -- both have books and websites. Or find an personal accountant.. the folks who do our taxes also do personal finance advice (and they don't work for a bank or anyone that is selling anything)

Edited to add: what the poster above me says about DVC not being tax deductable for them because they put it on a c.c, may not hold for the original poster.

Goodluck,
Heather

*If it is 2.9% for the life of the debt.. please tell us what credit card it is! You can checkout bankrate.com to see what all the rates are for credit cards, and I don't think anyone has rates this low.

 

[DWatWDW]

Originally posted by ksoehrlein
Not according to our accountant, unfortunately. As a result, we opted to "finance" DVC on one of our credit cards that was offering convenience checks at 4.5% for the life of the loan rather than paying Disney's much higher interest rate. Even better, we just did a balance transfer to a different credit card -- 1.99% for the life of the loan with no transaction fee!

For most people it is. Disney does send out an annual 1099 if you finance through them. Check this site under "(US) Tax Implications?":
http://www.intercot.com/resorts/dvc/faq/default.asp

The other reason I thought to pay off CC before DVC: DVC is a commodity. If a catastrophe happens (severe illness, job loss, whatever) you can sell it to pay it off. The CC is (probably) unsecured, and there is not such option.

Edit to add: My main point here is that there is more on the line than just the money. Before you take the advice "Pay off the higher rate first!", try to look at the big picture.

 

[crisi]

If you financed through Disney, and only have one other "home" - your DVC loan probably qualifies as a tax deduction. Or if you financed via a home equity loan. The rules are somewhat convoluted and everyone should read them for themselves or consult a tax accountant or an attorney.

If your loan is "unsecured" your DVC loan does not qualify as a mortgage for tax purposes and cannot be deducted.

But the real question remains - how long is the 2.9% rate good for? What will the rate be when it goes up? If you know this, you can plug the numbers into a debt calculator or Excel spreadsheet and work out what is most financially sound. 'Course, you could be betting that another cheap balance transfer offer will come through and you'll just move the money.

A third option is, if you have a home, take out a home equity loan. Pay off both the cc debt and the DVC mortgage. You'll have one low rate and one loan that is tax deductable.

 

[pooh.kim]

Thanks for all the replies!

Still not 100% sure what we're going to do, but all the advice is helpful.

Yes, the 2.9% rate was a promotion offered through Citi cards and is good till the balance is paid off. We, of course, NEVER charge on this card - actually cut them up as soon as we got them. I treat it like a loan payment with the same payment every month, not the minimum, several days early so no payment is late.

Either way, the "extra" payment will be added to the remaining one so both should be paid off completely in 2 - 2 1/2 years.
We no longer charge what cannot be paid off monthly and then we use a reward credit card. We also just started a new account just for Disney savings so those trips cannot be "charged" either.

 

[PooohBear]

sperk99....... I just got a home equity loan to pay off 2 loans we had, what do you mean when you say you can write off the interest in your taxes, do you mean the interest you would have paid?!?! I know it may be a dumb question, but I'm not very good with this kind of stuff

 

[crisi]

You write off the interest you will pay on the home equity loan. The bank will send you the proper forms at tax time with the right number in them for you to put in your tax forms. You cannot write off interest on consumer debt (credit cards) or debt larger than the value of your home (some people have 120% equity lines).

 

[PooohBear]

Thanks crisi !!!