Won $25k, should I invest or payoff $60k in cc debt??

Question

I recently won $25,000.00 from a lottery. After taxes I will take home approx. $18,000.00 I currently owe approx. $60k in credit card debt with interest charges ranging from 18-30%. I earn around $90,000 gross a year. Would it be wiser to just use all the money towards the credit cards or to invest it in some type of real estate or stocks??

Answer 1

The safest, and best way to go in most cases is to pay down your debts. Remember that the money you make from most investements (expecially stock) is taxable. So, assuming a 25% tax rate (estimate), that means the return you need to just break even against the interest rate is 25% higher than you are paying now. So, from 18-30%, you need a return of: 1.25x that, or about 25-40% (I rounded the numbers). Getting returns like that are near impossible on a reliable basis, and thats just to break even!

The real estate idea is an interesting one. I wouldn't normally recommend it to someone in debt, but your interest rates are awful! You might be able to get somewhere with it like this:

If you own your own home, you could get a HELOC on it (Home Equity Line of Credit). This will have a better rate since its guranteed against your house. The lower rate is due to the lower risk for the lender - if you don't pay your cards, they trash your credit rating, but not much else. If you don't pay your HELOC or mortgage, they take your house (AND trash your credit rating)! So, they can offer a lower rate.

The lower rate would translate to lower monthly payments. The 25k could then be saved or used to pay off part of the loan directly. If you do save it, make sure you don't touch it. When a person has 60k in cc debt, I think they might not have the best saving habits, so be sure to be careful not to blow the money, and DON'T get in more CC debt! You don't need that kind of pain. Take the advice of the people here, save some money, and then use that money for your shopping, don't use your CC's. You may even want to consider cutting them up. Or use a trick -

Pour a small tray of water, put the CCs in the tray and put it in the freezer. If you ever need your cards, you are forced to wait for them to thaw. It won't hurt the card, but it gives you about 20 mins to wait and think carefully before making a rush purchase.

Don't cancel the cards, they built your credit rating, and canceling them after they are paid off will change your ratio of borrowing (amount you borrow compared to what you could borrow) and that will lower your score. Just cut them up or freeze them, and keep paying the bills (if any).

If you don't already have a house, this is a good place for the 25k. It could make a nice down payment. If you live in AZ, let me know in your reply (I'm not contactable any other way to avoid spam). But here is the general idea - 25k could put a 10% downpayment on most small homes, or you could get a 3% downpayment [FHA loan] and cover the closing costs on a modest home (probably with some left over). Assuming you could carry the debt, you could then roll your credit card debt into the mortgage.

The mortgage rate would not be at normal rates, since you would be borrowing more than the home is worth, but it would beat the heck out of 18-30%, and if in the US, its tax deductable interest.

The trick then is NOT to run the cards up all over again - think seriously about what I said about freezing/cutting them.

Normally I would not recommend getting a home and related loan to lower debut, but your interest is so high and on a significant amont of money, I think its worth serious consideration.

Answer 2

The first thing you should do is cool off. Don't be anxious to do anything with your money until you have a plan. Don't blow the money before you have a chance to do anything with it or it won't be there when you do decide. Get that whole amount into a six or twelve month CD. You didn't have it before so don't give yourself the chance to spend it before you make the right choice. You can find the best CD rates on www.bankrate.com.

With that said, it doesn't have to be all or nothing. If you are tossed between those two options, use 1/2 for each. The sooner you invest the more compound interest you'll experience and the sooner you pay off the credit card balances the sooner you'll be debt free and can put that money into your long term savings. You should also consider a short term savings to avoid continuing in the credit card trap.

While looking at the CD rates on bankrate, look at the credit card rates (and terms) and consider getting ONE credit card to consolidate the higher (30%) interest rate cards you have. Then call the lowest rate card and ask them to lower your rate. They won't lower it unless you ask. You'll have leverage by telling them of the other offers you have. The odds are they won't want to lose your business.

Don't continue to just pay minimums... get that debt paid off in full with a plan. It may take you five years but concentrate on getting out of debt. You cannot tell me that all $60K of credit card debt was spent wisely. You have a decent income but what good is it if you owe it all. You seem to be living among your means. Stop the insanity.

If you dont have a 401K plan, get one today. It will reduce your taxes ... why give the money to Uncle Sam?

In short, get a plan and stick to it. That $18K after tax windfall may be just what you need to get ahead so don't waste it on adding to your problem but use it as a solution.

Answer 3

I do not wish to seem like a lecturer, but for someone making 90,000 a year, 60k in credit card debt is uncalled for. You make sufficient money that you should have no credit card debt at all. You should be saving about 20k annually and investing that.

By all means pay down your debt. You will get a better return doing that than investing. There are very few investments that will return 18%. Most are in the 10 to 12% range.

And learn to live within your means.

Answer 4

I think you might sort your debts by interest rates. Take a month or two and pay off the higher-costing debts first. If you take a month or two or three to do that it will look like you are making payments and that may appear better on your credit report. Then pay extra on the others over the next year or two--don't miss any payments--and you will qualify to roll over the remaining debt into credit that gives you a better rate of interest.

Since you don't have enough to clear the debts. By appearing to be a better debt payer, you will get better debt offers than you have been having. So carefully spread it around, but attack the high-cost debt most vigorously and first.

Answer 5

Can you invest in some type of real estate or stocks that are guaranteed to get you 18-30%? If not, then pay your credit card debt! It's the better investment!

Answer 6

If you are not a savy investor,the best choice is to invest in real estate,however wiht 18k,you will not make too much of an investment.
The forex would also be a good choice,but you need to be much more informed than you seem to be,otherwise its risky.
To pay of some of your credits is also a good option,however,you will only be able to cover about 30% of your total deth.
If you find a good investment opportunity like the russian stock exchange or the romanian or other emerging markets,your 18k might bring you 35-40% gross benefit /year.

Answer 7

Pay off your debts as fast as you can. You will not get a higher rate of return on any investment. On $60,000 at 18% your interest burden is a minimum of $10,800 per year. Reduce your debt by 18 thousand, and your interest burden is $7,600 per year. That is a savings of $3,200.00 in interest debt per year.

Invest $18,000 and you might get a 10% return, or $1,800.00. After taxes your net income would be $1,350.00. Compare that to $3,200 and which would you rather have?

Answer 8

y r u paying tax on a lottery?

it depends on the interest rate + the return u expect, probably u should pay the debts

Answer 9

Paying off the debts is never the wrong way to go.

Answer 10

$17,950 towards the credit cards.
$50 on books about financial management.