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Wednesday, October 8, 2008

Prioritizing Debt: From Lowest Interest Rate to Highest? Say What?

Credit card art?Image by hankoss via FlickrYou and I know that the rational thing to do is to pay off your high-rate, non-deductible (i.e. non-mortgage) debt first. (Except you need to prioritize your mortgage payment before anything else so you can keep your house--but any EXTRA payments need to go to non-mortgage debt.)

Isn't it ironic that that's exactly the opposite of how credit card companies apply your payments? I was smart enough to avoid this particular trap, but it's easy to get snared in it.

Let's say you take a low-rate balance transfer offer, intending to pay off a higher rate card. Cool. Just don't ever use your new card to charge anything. Ever. Because if you do, they'll charge you a higher rate for purchases than for balance transfers. OK, that's fair, you think. But then they apply your payments to the lowest interest debt. So you are gaily wracking up new debt at a higher rate, and retiring the cheap debt. This policy is fairly universal among credit card issuers.

Good plan for the credit card company. Not a good plan for you. What tangled webs they weave when they practice to deceive. Can you say "Bait and Switch"?
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