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I don't mean to be rude, but it drives me absolutely crazy that someone would give bad advice like this.
First of all, it makes no sense to pay them in any other order than the order of interest rate (highest first). And you offer no reason to go against what makes the most sense financially.
Second of all, canceling the cards will hurt your credit score. Simply don't use them. And the rate on the bottom 3 shouldn't go up unless you stop paying the minimum balance on each card.
Your motive is to minimize interest payments, but that may not be the "best" solution for the OP. Hitting the highest interest rates first can save you a little money, but sometimes it leads to false economy.
When you're deciding which debts to pay off, you have to consider at least three different things which may take priority over the interest rate.
Cash Flow
Retiring the smaller debts earlier gives you a bigger cash cushion and lets you get by with a smaller emergency fund. If you can get rid of a $50/month minimum payment on your smaller bills, you'd need $300 less in your emergency fund, and still be able to pay an extra $600/year toward the next target. That extra $900 cash flow is a great motivator, and it can also be a lifesaver if your income drops unexpectedly.
Debt Volatility
With today's low low low interest rates, any financial advisor worth their salt will tell you to pay an extra half point to lock in a fixed rate instead of an ARM. Their reasoning is that interest rates have nowhere to go but up, and the fixed rate will protect you from volatility. You do pay a little more in interest up front, but the insurance it provides can be priceless when rates go through the roof and you aren't able to refinance your home.
This concept is just as true for credit cards as houses. Interest rates have to go back up one of these days, and paying off the debts that are likely to increase significantly when rates rise can save you a lot of money compared to blindly throwing money at the one that has the highest interest rate today.
Collateral
One never knows what tomorrow will bring, so it's a good idea to ask yourself what will happen if SHTF.
If you get laid off, or even just lose hours at work and don't have enough money to pay all your bills for a while, a credit card company can't repossess your car or foreclose on your house.
I think paying a minimum on 27% would barely cover the monthly interest.If the "highest rate" were closer to the other rate, sure. But 27%! Does that indicate past due payments?
Your motive is to minimize interest payments, but that may not be the "best" solution for the OP.
My motive is to pay off the debt the quickest, most cost effective way. The OP didn't give enough details to suggest any other way. I'm answering the question "Is it better to pay off high % or high balance first"
Quote:
Originally Posted by sterlinggirl
Cash Flow
Retiring the smaller debts earlier gives you a bigger cash cushion and lets you get by with a smaller emergency fund. If you can get rid of a $50/month minimum payment on your smaller bills, you'd need $300 less in your emergency fund, and still be able to pay an extra $600/year toward the next target. That extra $900 cash flow is a great motivator, and it can also be a lifesaver if your income drops unexpectedly.
That's nice but you'll be in debt longer. But if it makes you feel better to cross a smaller balance off your list, go for it.
But the question was "Is it better to pay off high % or high balance first"
Quote:
Originally Posted by sterlinggirl
Debt Volatility
With today's low low low interest rates, any financial advisor worth their salt will tell you to pay an extra half point to lock in a fixed rate instead of an ARM. Their reasoning is that interest rates have nowhere to go but up, and the fixed rate will protect you from volatility. You do pay a little more in interest up front, but the insurance it provides can be priceless when rates go through the roof and you aren't able to refinance your home.
This concept is just as true for credit cards as houses. Interest rates have to go back up one of these days, and paying off the debts that are likely to increase significantly when rates rise can save you a lot of money compared to blindly throwing money at the one that has the highest interest rate today.
I'd rather pay the balance on the card that has a high balance TODAY then pay on a balance with a low rate because one day it *Might* go up. Again, just wanting to pay off the debt the quickest most cost effective way. The OP needs to try to get the rates reduced and always be on time with minimum payments (if possible) to avoid a hike in the rates.
If your rates change you need to adjust your plan.
Quote:
Originally Posted by sterlinggirl
Collateral
One never knows what tomorrow will bring, so it's a good idea to ask yourself what will happen if SHTF.
If you get laid off, or even just lose hours at work and don't have enough money to pay all your bills for a while, a credit card company can't repossess your car or foreclose on your house
This is a nice point, but doesn't answer the question which was "Is it better to pay off high % or high balance first"
I agree that you should pay your mortgage first. And, if you don't have an emergency fund, build one before you start paying extra toward your credit card debt. And don't whipe out your savings or borrow from your 401k or take out a home equity line of credit to pay your credit cards off.
You are better off with a roof over your head and an emergency fund than no credit card debt.
I see your point and there are reasons you might want to go in the order the OP posted the cards in. But I read the question as which way is better. And by better, which way will save him money in the end and get the debt paid off faster. It sounds like he has a good job now and can start tackling this debt.
Hearing 7 years and 10 months depresses me and it isnt even my debt. Let's hope you have more than $400.
The website I gave also has a feature where you can say when you want to be debt free and it tells you how much you have to pay per month to reach your goal. It's pretty neat! Hopefully the OP's minimum payments are less than the numbers I used and he'll pay more than $400 a month and get out of debt faster!!
My motive is to pay off the debt the quickest, most cost effective way. The OP didn't give enough details to suggest any other way. I'm answering the question "Is it better to pay off high % or high balance first"
Quote:
I'd rather pay the balance on the card that has a high balance TODAY then pay on a balance with a low rate because one day it *Might* go up. Again, just wanting to pay off the debt the quickest most cost effective way.
Quote:
And, if you don't have an emergency fund, build one before you start paying extra toward your credit card debt.
You're contradicting yourself Alex.
If saving every penny in interest is the best way to get out of debt, it doesn't make any sense to keep money in an emergency fund that you *Might* need while that money could be saving you 27%.
On the other hand, if you're saying that the "quickest most cost effective way" isn't always the best way, I'll have to agree with you.
(I guess it won't matter much when the interest of the bottom 3 go up to 27% will it?)
The discussion has strayed some from the original question, quoted above. 27% interest is quite a bit more than 4%. While it's true that if one of the above debts was a car loan against a car needed to commute to work, there would be some sense in prioritizing paying it off since your paid-off car is not subject to reposession; although, not being able to pay for the car probably means you have been laid off, so don't need the car that bad...
Anyway I stand by my original post that the mathematically correct thing is to pay off the highest interest loan first, and, responding to the OP's parenthetical statement, prioritize paying at least the minimum on the remaining low interest cc's on time or early every time so they don't reset to something like 27%, which is, in general, a punitive rate imposed when you pay late.
There are some deadlines in life that are flexible and some that are not. The difference between always paying credit card bills and mortgage payments on time and having a few late payments is huge. I'm not saying that's the way I want it, or how I think it should be; I'm just saying this is how it is.
Last edited by M3 Mitch; 06-16-2009 at 04:55 PM..
Reason: on time or early every time
If saving every penny in interest is the best way to get out of debt, it doesn't make any sense to keep money in an emergency fund that you *Might* need while that money could be saving you 27%.
Saving every penny in interest that you're putting toward your DEBT is the quickest way to get out of debt. So, if you have $400 to put toward debt every month, you can get out of debt in 7 years instead of 10.
I think you're trying to argue to argue. In no way did I ever suggest he not pay this mortgage or not have an emergency fund in order to get out of debt.
Question: Is it better to pay off high % or high balance first? Answer: high %
I just noticed- the OP's lowest three cc interest rates appear to be intro rates, as he/she refers to "when these three go up to 27%." If they're intro rates, they're likely maybe 5-6 months and then they go up to 27%! Why so high? My cards, if they offer an intro rate, don't go up to half that. Does it depend on one's credit score?
It seems untenable to owe anything significant at 20+%, never mind closer to 30%. That is indeed buried, if the lower rates are intro.
I found this Debt Reduction Planner a few years ago, and I think it helps out a lot. Give it a try. It gives you 3 different scenarios. 1. When would you be debt free if you only pay minimum payments; 2. When would you be debt free if you pay $______ a month; and 3. Insert when you want to be out of debt, and it will tell you how much you will need to pay each card to be out of debt by that certain time. It also tells you how much interest you end up paying/saving, etc. It's pretty handy. Calculators - Debt reduction planner
Can I make a suggestion? (I know this is a couple of years late but maybe someone else might find this useful) I would suggest instead to try to refinance the majority of your loans to a lower interest loan. Your interest paid will be decrease and you could pay towards that loan eliminating all the guesswork of which loan to payoff.
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