0% APR Question...

[superwoman]

Back to the original post/question...

Among the many things that impact your credit score, two important ones are:

1) Do you always pay at least the minimum payment, on time.
2) What is the ratio of credit card debt to available credit.

Whether you pay in full, or make a minimum payment, you are building a good standing with regard to item 1. But carrying a balance doesn't "help" your credit score, because it actually hurts you with regard to item 2.

Now, if you're really considering paying these off monthly, vs. letting it ride, you're probably not talking about thousands of dollars, which means that it may not impact that ratio very much. So the amount of "damage" that you do might be very very marginal. But the idea that carrying a balance helps is wrong.

Interestingly, if you can keep the 0% thing going forever (highly doubtful), then you could theoretically invest that money in some other asset (CD, Home that is appreciating) and gain money on the investment while not losing money on the CC debt. But again, if we're talking about a value that you could (if you wanted) pay every month, we're probably only talking about very marginal gains on any kind of investing.

Just a thought.

Thanks. This is what I wanted to know.

 

[jeremy.king]

True enough. Which is why I am planning on paying off the mortgage ASAP.

You don't have to pay it off so fast.

 

[D0ct0rteeth]

You don't have to pay it off so fast.

Comments on the "I can Write off the Interest" Myth, that seems to be the most popular reason people say you should keep your mortgage:

It's widely known that you can write off the interest of the loan (not the principal) in your income taxes. Everyone keeps telling me that you should get a loan so I can write off the interest. Okay, that's nice... but why not just pay for it outright I ask them? Their response is always, "Because then you can't write off the interest."

So if people would stop repeating what other people say and actually think about it, they might not think that way. Let's do the math here... A 15 year loan for $385,000 at 7% interest would be $3,460.49 per month. That means you have paid $237,887.99 over the course of the loan (roughly $1/4M in interest). Wow, that's fantastic, eh? Now you can write off $237,887.99 that you paid out that you otherwise could have simply kept. Which at a 30% tax bracket would be a savings of $71,366.40 because of your write off.

Hmmmm... pay $237,887.99 so you can get back ("save") $71,366.40. What a deal!

It is a good thing, but if you can pay cash, that's better... it's funny to see people argue that you should "keep" your money rather than pay off your loan so that you can have the tax "break".

If you are reading this, and you think it's a good idea, maybe you should shop around for the highest interest rate you can find, because then you get a bigger tax write off.

 

[jeremy.king]

So if people would stop repeating what other people say and actually think about it, they might not think that way. Let's do the math here... A 15 year loan for $385,000 at 7% interest would be $3,460.49 per month. That means you have paid $237,887.99 over the course of the loan (roughly $1/4M in interest). Wow, that's fantastic, eh? Now you can write off $237,887.99 that you paid out that you otherwise could have simply kept. Which at a 30% tax bracket would be a savings of $71,366.40 because of your write off.

Now, thats unfair to pick one argument out and blast holes in it...People usually use the write off argument when combined with a scenario where they have an interest bearing investment that would yeild MORE than the interest rate you are paying a home lender.

Take your example, if you wanted to pay off that home in say 7 years instead of 15, then you would have to overpay by roughly $2350/month - still costing $103K in interest.

Instead, take that extra principle and invest it in something earning say 10%* (compounding monthly), after 7 years it would be worth roughly $273,000 and after 15 (house now paid off) its worth $974,005.31. Start saving that $5810 after year 7, in the first example, and in 8 years thats worth $849,312.05 leaving you about $125K short of the first example. Great, since you saved $134K in interest, right? Well, not so fast, you still need to add in tax deductions (and possible shifts in income brackets) which means that if you saved more than $9K by using 15 years instead of 7, then its not worthwhile paying that home off early.

Bottom line to those that made it this far in my post, consult a financial advisor when deciding how to allocate your money...Especially if you are blessed enough to have an extra $2350 a month to "play" with.

*the hypothetical 10% return for 15 years straight is a bit of a stretch, but then so is a 7% interest rate on a 15 yr loan...

EDIT: PS - why is this in the Buying Tips forum?

 

[WildCowboy]

And don't forget that because of inflation, $100,000 now is a lot more expensive than $100,000 twenty years from now. People always forget about the time-value of money, one of the basics of finance.