Paying off credit card debate

[AmongMadPeople]

Why would one want to pay the car payment first? You have a car payment at 6% for say 10,000. And a cedit card for 10,000 at 21%. Wouldn't it be better to pay the credit card?

I think minimum payment amounts matter a heck of a lot more than interest rates or outstanding balances. We successfully snowballed by paying off high minimum payment debts first.

Although, no one suggested paying down the car first, did they? I thought they suggested selling the car if they were still paying on it?

And just for the OP's friend, another huge "No!" vote for 401K loans or home equity. Cut back in your daily budget before you make a risky, desperate move like that.

 

[crisi]

Why would one want to pay the car payment first? You have a car payment at 6% for say 10,000. And a cedit card for 10,000 at 21%. Wouldn't it be better to pay the credit card?

There are a number of ways to do it.

The most "math centric" one is to pay off the highest interest debt first. This will net out with the most money for you - but isn't necessarily the most rewarding.

Snowballing has you pay off the SMALLEST debt first, then apply that payment to the next debt. It has the advantage of seeing the number of bills go down quickly and gives a psychological boost.

Another way is that if you have a lot of little bills - but one big fixed bill - like a car loan - that doesn't have much less on it - pay that off. That gives you the biggest cash flow benefit and frees the budget logjam fastest. I actually like that one a lot - I'm a free cash flow fan. But sometimes it means selling the car and buying a running beater in order to get rid of the payment. And sometimes you can't break even enough on the deal to end up with working transportation.

 

[TomAndLori]

Why would one want to pay the car payment first? You have a car payment at 6% for say 10,000. And a cedit card for 10,000 at 21%. Wouldn't it be better to pay the credit card?

Typically you pay the smallest debt first in a Snowball. This includes everything but the mortgage. If they only have six months left on the Car loan, the interest rate is negligible at this point and it may be one of the smaller debts. But the payment is likely much higher than a CC minimum payment so it frees up cash flow if you are too tight. Plus that debt is secured by the car and I believe you should tackle that first.

Usually they recommend selling the car, but so close to payoff that does not make sense. So have a garage sale, eat Beans and Rice, cut out the cable and pay that sucker off quick so you can free up that high payment for the high interest CC.

It is just one more thing to look at. It wasn't mentioned originally.

 

[nicolet]

I know Dave Ramsey would ask if they had a Car payment, and if so, get rid of that first.

I think I was asking why Dave Ramsey would pay the car first? Instead of Credit Cards? Usually Car loans are lower rates then CC.

 

[crisi]

I think I was asking why Dave Ramsey would pay the car first? Instead of Credit Cards? Usually Car loans are lower rates then CC.

Because you honestly shouldn't HAVE a car loan - you should have paid cash for your car. DR is pretty big on the whole "get rid of the car loan" because he's seen a lot of cases where people are driving themselves into bankruptcy over their cars.

So sell the car, get rid of the car loan, and drive something you can afford to pay cash for.

 

[crisi]

Why would one want to pay the car payment first? You have a car payment at 6% for say 10,000. And a cedit card for 10,000 at 21%. Wouldn't it be better to pay the credit card?

There are a number of ways to do it.

The most "math centric" one is to pay off the highest interest debt first. This will net out with the most money for you - but isn't necessarily the most rewarding.

Snowballing has you pay off the SMALLEST debt first, then apply that payment to the next debt. It has the advantage of seeing the number of bills go down quickly and gives a psychological boost.

Another way is that if you have a lot of little bills - but one big fixed bill - like a car loan - that doesn't have much less on it - pay that off. That gives you the biggest cash flow benefit and frees the budget logjam fastest. I actually like that one a lot - I'm a free cash flow fan. But sometimes it means selling the car and buying a running beater in order to get rid of the payment. And sometimes you can't break even enough on the deal to end up with working transportation.

 

[TomAndLori]

Because you honestly shouldn't HAVE a car loan - you should have paid cash for your car. DR is pretty big on the whole "get rid of the car loan" because he's seen a lot of cases where people are driving themselves into bankruptcy over their cars.

So sell the car, get rid of the car loan, and drive something you can afford to pay cash for.

Exactly.

The argument is, and I agree with it, is that a new car loan is one of the poorest financial decisions you can make since you lose I think close to 30% in depreciation the first year. Once you drive off the lot with that new 1% loan, you automatically owe more than the car is worth. Seems like a pretty obvious mistake, but our society assumes a car loan these days. Good marketing by car manufacturers.

Ramsey really does not have a problem with buying new cars if you have the money to pay cash and have taken care of your future first. Otherwise buy a used vehicle you can afford to pay cash for and get the rest of your ship in order first. This is why in his radio show he targets those car loans. He seems to consider them even dumber than CC debt and at least with selling the car you can usually get out of a bunch of debt quickly. Which is the main thrust of his course. Get out of all debt but the house as quick as you can no matter what it takes.

After we bought my father in law a used car some years back, we decided we would never buy new again. And this is before I started listening to Dave Ramsey. I just could not believe the deal he got. He bought a nicer car than I had, had half the miles on it, and paid $1000 less than I still owed my car at the time. We have not had a car payment since we paid that one off and will not ever have one again.

 

[dzorn]

Never replace unsecured debt with secured debt.

If they managed to rack up 20,000 once they will do it again.

Denise in MI

 

[tinker&belle]

Because you honestly shouldn't HAVE a car loan - you should have paid cash for your car. DR is pretty big on the whole "get rid of the car loan" because he's seen a lot of cases where people are driving themselves into bankruptcy over their cars.

So sell the car, get rid of the car loan, and drive something you can afford to pay cash for.

Dave's rule of thumb he tells callers on his show that a car loan amount (when starting the snowball process, not for advising people on vehicle purchases) is acceptable to keep if 1) The value of the car is less than half of their annual net income and 2) The car can be paid off in a short amount of time (I believe he says 18 months, but someone may correct me on this).

 

[LovableGluttons]

With their small mortgage, I don't understand why they don't just write out a budget and allocate all extra funds to their unsecured debt? How big could their car payments possibly be? With the credit card and student loan debt, they could possibly have everything paid off except for the mortgage in a couple of years.

I would not feel secure borrowing off my home or retirement.

If one or both could pick up extra work on the side, they'd be too busy to shop, plus could kick that debt quicker.

 

[bumbershoot]

With their small mortgage, I don't understand why they don't just write out a budget and allocate all extra funds to their unsecured debt? How big could their car payments possibly be? With the credit card and student loan debt, they could possibly have everything paid off except for the mortgage in a couple of years.

I totally agree. I wonder if they are just scared that they can't find that "extra" money, or don't *want* to do what it takes to get and find the money.

They do have one car payment that is paid off in 6 months so I don't think it would be best to get rid of that. It is for an older car. Her hubby drives a beat up truck.

Wonder what they are planning when that car loan goes away? First step would be to see if they are going to replace the car with a new car and loan...if so, just step away...they aren't serious.

 

[StitchBuddy]

My husband and I had the same problem our first year of marriage. He bought a ledger and we listed everything and I mean everything we spent money on to see where all our money was going. We were amazed at where our money was going. That was almost 25 years ago and even now I think twice before I buy a drink at the mall or even when we go out to eat. It made a big impression on me. We had several credit cards and we paid off the one with the highest interest first until we got them all paid off. It was a valuable lesson, we have never carried a balance since. We also limit ourselves to one card. I hope they can get in better financial shape. It feels great to go to a car dealership and pay cash for a new car!!

 

[pearlieq]

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.

I'm not sure this is really fair.

The person you quoted has a different way of looking at things. Not better or worse, just unconventional and maybe a little more aggressive than you would choose.

It doesn't mean the person is wrong or passing judgment. They're just using a tighter/more conservative standard that you appear to feel comfortable with.

There's nothing wrong with offering up another opinion or viewpoint. Sometimes we get so caught up in the status quo that we fail to recognize the merit of an idea that's different from the norm.

 

[pearlieq]

I think they got into the...I don't car if I con't have cash I am going to buy my "things" because I deserve it and work hard. That's what she told me the other day when I was getting a pedicure. She wanted one too because she works hard then proceeded to charge it.

If I could offer you a nickel's worth of free advice, it would be not to get too far into this with your friends.

It's awesome that you've been willing to listen to her and that you're trying to help her. That's the service of a true friend. But it sounds like their problem might be a little stickier than just a plain leaky budget.

If things take a wrong turn, it could come to pass that she now feel like she has to justify her spending to you and might begin to resent it or imagine you passing judgment on her, even though you're not.

You, in turn, might start feeling frustrated when they continue to charge things they "deserve" or choose to take the 401k loan even though it's a bad idea.

Money is just so personal. Sometimes getting involved in a friend's financial situation can make things get weird.

 

[kirstenb1]

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.

Sorry for ranting, but that was a judgement.

OP. Snowball it! Convince them it is the best way!!

I would download one of the snowball spreadsheets online and show them the numbers and how quickly they can pay it off.

I don't think they should sell their home, but 20k in credit card debt is crazy debt!!! Egad!! I couldn't sleep at night with that kind of cc debt, which is likely 20% interest tacked onto it. They need to cut spending to the bare bones, and knock it down.

I won't address mortgage debt, because that varies too much depending on where you live. But 20k in cc debt---please---something has to change drastically!!

 

[Cooky]

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[hambirg]

If you know the snowball method, then you're familiar with DR. He says (and I agree) that it is a bad idea to replace unsecured debt with a secured one. The current financial situation is enough to show your friend that anything can happen, even if they think they are secure in their jobs.

What happens if they hit a financial crisis? Instead of just not being able to pay credit cards, they lose their home. Bad, bad idea.

Just my $0.02.

I haven't read this whole thread. . .but this! You just never know what is going to happen. When I was still married we used to get the hard sell about taking out some of the equity in our home. . .it was quite a bit. BUT. . thank gawd my ex was so simple minded and never saw any logic in pulling out money that's not "real". He never got any of that argument. I, on the other hand, wrestled with it. . .but felt it was just too risky. I was always taught to get it paid off. . .not use it as a bank. Considering how much my life has changed in the last few years, I'm sooooo grateful we never tapped into it. I would be in a world of hurt if we did!

 

[MrsPete]

A 255K mortgage for a household making $100-125K is not over their heads.

Well, we don't know whether they're over their heads or not . . . not from JUST their mortgage and their income.

Suppose two hypothetical families have those same figures . . . but one of those families has only one child and no other outstanding bills, while the other family has three children, one of which has medical needs, plus they have a live-in grandparent and two car payments. I'd bet that one family would be just fine -- able to put away money into savings while having a few splurges -- yet the other family would barely make it each month.

In this case, I suspect that this family IS over their heads. Why? Because they've fallen into the habit of using credit cards to support their lifestyle AND because they can only pay the minimum balance.

If they're house-poor, selling the house may be a good option -- depending upon the real estate market in their area at this point. If that's not an option, they might also consider cutting back their lifestyle in other ways. But something has to give, or they'll never get out of this mess.

 

[MrsPete]

Exactly. They def don't have a huge house. Could they get a smaller one..sure. But, again, they have the equity in this house and houses are so much more now so they would end up with the same mortgage for a smaller house.

It's hard to talk about house prices on a board like this. Where I live, you could have a mini-mansion for that price. The "everything I want" house I plan to build for my retirement won't cost that much.

I think they got into the...I don't car if I con't have cash I am going to buy my "things" because I deserve it and work hard. That's what she told me the other day when I was getting a pedicure. She wanted one too because she works hard then proceeded to charge it.

This is so common these days! Listen to advertisers -- they love to use the phrase "you deserve it". We don't deserve luxuries we can't afford!

This convinces me that your friend is the wrong person to borrow against the house or retirement. She wants the debt to go away, but she doesn't have -- at this point -- the right mentality to make sacrafices to pay it off. This makes me think she's the person who'd borrow against the house, then run the credit card bills up again.

 

[eliza61]

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.


I would download one of the snowball spreadsheets online and show them the numbers and how quickly they can pay it off.

whew, I thought I was the only one that thought that was a dracionian measure. LOL.

Depending on where you live a 255K mortgage is a rather routine single family 3 bedroom house.

out of the 2 options I would probably go for the loan on my 401K if I knew my job was secure (well as secure as a job could be nowadays). My 401K offers loans at 3% and the interest is paid back to the borrow. downside is that those funds are no longer making money for you.

Have they tracked their budget? It seems like there maybe some cash going out the window that maybe they don't know about.
They may be running up cc debt on things they don't really need. No matter how they pay off the debt if they don't address their spending habits its very likely they will be in debt again.