Would you pay off your bill early or let your money sit and earn interest?

[dullard]

Originally posted by: venk
As long as Interest Rate Earned > Interest Rate Payed, then you keep the money. Regardless of debt.

In a simple world, that is true. This is not a simple world. Imagine if that interest rate paid is a function of debt. That simple change makes the problem far more complex. And it makes your "regardless of debt" part false in many cases.

Extra debt, especially those 0% loans (because it is easy to give yourself excuses to have too many of them) can easilly make your credit score plummet. ATOT example. If your credit score plummets, then your interest rates go up. Your car insurance rates go up. Etc. Depending on Gobadgrs situation, it may indirectly cost him more than $200 to have that 0% loan.

 

[Engineer]

I hate debt also, but now that I'm mostly debt free, I'm starting to think that I would rather earn the interest. Personally, I would just let it sit, pay minimum payments on it (set your online to do it automatically if possible) and then make sure to pay it off several weeks before due. Interest FTW...IMO.

 

[thomsbrain]

if you are responsible, then save it until the bill is due. if not, pay it as soon as possible.

 

[thirdeye]

I'd probably pay it off over the course of your no interest. Like someone said earlier it shows that you have a good payment history which helps your credit, and you'll also not be out of a huge chunk of cash and need to go back into debt if something unforseen comes up and requires more money than you could normally alot.

 

[Golgatha]

Here's the problem explained in simple terms. If you have a lot of these $5,000 purchases out there, then your credit rating becomes lower simply because you have many balances out there and are a greater risk to lenders. If you plan to apply for credit for any major purchases within the year that your current purchases are only being paid off at the miniumum level, then it could end up costing you money in the long run because you won't get the best possible interest rate. Also, your insurance premiums for your house, car, etc. could go up when your insurance company rerates you because of your now lower credit score.

Now if this is a single purchase, you have no plans to make any major purchases within the next year, and $5,000 is a small percentage of your yearly income; yes you will make at least part of that $200 in real money over the year and your credit rating shouldn't be affected. Also, the financing company who gave you 0% for a year is just out of luck because their principal has devalued due to inflation.

Now, if I had just made a $5,000 purchase and had the excess cash to pay it off, I would mark it on several calendars and throw that money into a Money Market account for the year. In my situation, the only debt I have is my home loan and I don't plan on making any big purchases over the next year, so it makes sense for me to let the money collect interest. Knowing myself, I would probably make larger than miniumum payments during the year too just for peace of mind.

 

[GoingUp]

I only have a couple of debts right now.

My Mortgage.
My student loans (currently deferred due to grad school)
Monthly credit card bill which I pay in full
My $5000 bill with 0% interest and 0 payments for 13 more months.

Looks like I got a lot of good advice in this thread.

I think I'm going to make a monthly payment in the tune of $200-$300 dollars. That way I get to keep some of my money for emergancies and making interest and make sure that my credit score isn't negatively impacted.

Thanks for the advice everyone.

 

[ISAslot]

I funded my IRA with $4k from a 0% interest CC

 

[Kev]

Originally posted by: dullard

Originally posted by: venk
As long as Interest Rate Earned > Interest Rate Payed, then you keep the money. Regardless of debt.

In a simple world, that is true. This is not a simple world. Imagine if that interest rate paid is a function of debt. That simple change makes the problem far more complex. And it makes your "regardless of debt" part false in many cases.

Extra debt, especially those 0% loans (because it is easy to give yourself excuses to have too many of them) can easilly make your credit score plummet. ATOT example. If your credit score plummets, then your interest rates go up. Your car insurance rates go up. Etc. Depending on Gobadgrs situation, it may indirectly cost him more than $200 to have that 0% loan.

At least this is decent reasoning.... and not "Derrrr I don't like having debt"

 

[RossMAN]

I would pay it off.

 

[DainBramaged]

Personally, I'd just pay it off to make sure. You never know what will happen later.

 

[GoingUp]

^

 

[Taggart]

1. pay off the debt
2. get better credit score
3. ?
4. profit!

 

[Kelemvor]

Take the free money. Paying off the debt early doesn't help you in any way. As long as you don't pay it off late, it doesn't hurt your credit score to keep it.

 

[Kevin]

As long as the $5k isn't taking up the majority of your credit line, I would invest the $5k. If you think you don't have enough discipline and don't care about liquidity, put your money in a CD. You won't lose your principal and the maturity date should coincide with your due date depending on whether or not you time it right. If you want liquidity with minimal risk, then your original savings account plan would probably be the best. If you want a better return with slight risk (your principal is not protected), invest in an Index fund. There are a few out there that mimick the S&P 500 which would give you a nice return. In the last year, the S&P has yielded roughly 10%. (Sorry for making things more complicated for you )

 

[her209]

I'd take more money out of the 0% if I could.

 

[Staples]

Pay it off as soon as possible. $5000 isn't going to earn that much interest.

With it paid off and me not having to worry about it ever month is worth the $50 you might make in interest.

Edit: Oh well it is $200. That is a little more enticing. I might do the monthly thing if it is an automated billing and I don't have to worry about it.

 

[everman]

You still have minimum monthly payments, so you'll earn less than 4% after factoring in those cash flows.
Also take into account how leveraged you are (current debt/available credit), impact on your credit score.

 

[cjgallen]

I had a 0% credit card not due until December this year. Would have made ~$100 in interest, but I hated having the debt hanging over my head, so I paid it off.