Pyramid method or pay off highest interest first?

[lenshanem]

Any advice from those who have paid off their credit cards? I'm wondering if we should start with the lowest balance or the highest interest card? Actually, we could pay off my car with a low interest rate in full (not much left on it) OR pay off half of our Visa with a higher interest rate. (It is like 10.40 I think.) I'm thinking it would be wise to put money on the Visa, but then again it might be a mental boost to have the car paid off and one less bill. Thoughts?

 

[RobinFabulous]

The only reason I wouls pay off the car is if you could take a percentage off for paying it off early, or if you could lower the insurance (from full coverage to just liability) to save money. The best thing to do is pay off the highest interest rate card first, then work your way down. (Unless it's a mortgage and the interest can be used for tax purposes)

 

[prncess674]

Pay off whatever has the highest interest rate. While it may *feel* good to have one less bill, it will actually mean MORE money out the door, so resist the urge and pay off the highest percentage first.

 

[DMRick]

I would prob pay off the lowest balance, and make sure any extra money after paying it off and all of that payment now goes to the higher interest card. It would be helpful to have more figures, so I could do some math and see just how much interest you are talking about.
I wouldn't drop my collision, just because the car is paid for..if you had an accident, you would be right back paying for another car.

 

[girli565]

It is true that you could pay the car off but if it's value is high enough you still should have full coverage on it. If you can just have liability than pay the car off first because it will save you more than just the car payment. Then you can apply the car payment amount to the visa every month.

This is just thoughts. when i payed my debt off I did it by interest rates.

 

[Aimeedyan]

We are doing the 'pay the lowest off first' thing, not by interest rate (though our rates aren't really varied so it's not a big deal either way). Both of us aren't so good about long term goals, and we know that boost of paying off a small debt every few months will get us more geared up at paying off the big things. If I had a 22% card or something we would def get it taken care of first.

The psychology behind it works for us.

We are snowballing and have paid off two smaller debts already and are paying down the next one so much faster with those two out of the way.

 

[prncess674]

Also remember that student loans and mortgages debt interest is tax deductible. You should continue to make the minimum payments on these and pay off everything else before trying to pay down on these.

 

[annsteere]

If you pay down the credit card debt and hit an emergency, you have the flexibility of using the card again. That means you can put every dollar of "extra" money toward that debt.

If you pay down the car, you own the car but you don't have any way to get that money back if you need it in the future.

Go for credit cards and make the monthly payment on the car.

 

[lenshanem]

Thanks everyone. Seems like there are alot of different approaches out there! I'm still not sure...

We're definitely not switching my car insurance to just liability, it isn't that old.

 

[SandrA9810]

I'd go with the car.

We had about 10 active cards, maybe more... with mostly 500-1000, and 2 above 3000. We took our tax return and paid off the smaller ones. Which felt really good. All of our interest rates are high (mostly near 20% and above).
But now we have only 11,000 left all around. And no matter what, I don't change the minimum amount I send, and try to do more at the end of the month. Soon enough those 100 min payments are down to 60$, and if you've always sent say 150 a month, that's 90$ more going towards the actual debt, not just interest.

I also do some shuffeling some of the time. Bank of America likes to do 6-9month promotions for balance transfers for like 5%. Unlike those 0% interest for 6 months or a year, the interest doesn't compound over the time, and anything not paid off just goes into the regular interest rate. So for those 9 months, I have a lower interest rate.

Once I get a card below a 1,000 I focus on getting it paid off completely by sending them everything I got.

 

[DMRick]

Also remember that student loans and mortgages debt interest is tax deductible. You should continue to make the minimum payments on these and pay off everything else before trying to pay down on these.

I don't agree on that for your mortgage unless you have really low interest rates and you are putting the savings on the interest into an account that will give you a benefit. The deduction just isn't that much. It's not like you get back the interest, you just get to deduct it. More and more people are going with a standard deduction as in any case.

 

[EthansMom]

There's a lot to be said for paying off the highest interest rate first. You DO save more money on interest. However, by paying the car note completely off, you'll completely free up that amount of disposable income each month. You could then take ALL of that money and put it toward your VISA bill each month. But, you'd also have the flexibility of using that money if you had an unexpected expense one month.

Considering the VISA is relatively low at 10.4%, I'd side with having the flexibility of fewer fixed expenses and pay off the car.

 

[GRUMPY PIRATE]

Pay off the high interest rate card FIRST, because when figuring credit scores etc., the car is a SECURED loan on an item, the credit cards are not. SO if you have to apply for something, it will show that you are paying off an unsecured credit card with more than minimum payments. And by paying off the Credit card, you are increasing your credit/debt ratio, which again, is used to compute credit scores. the car will take care of itself, as it shows that you have the ability to pay off a secured loan over time.

I used that method, and now have a score well over 800.

 

[prncess674]

I don't agree on that for your mortgage unless you have really low interest rates and you are putting the savings on the interest into an account that will give you a benefit. The deduction just isn't that much. It's not like you get back the interest, you just get to deduct it. More and more people are going with a standard deduction as in any case.

Most mortgages are no more than 6%, most consumer debt is in the 15 to 20% debt. The best rule of thumb is pay off the highest rates first. It may feel good to pay off a car with a small balance, but more than likely the car's interest rate is MUCH lower than consumer credit card debt, especially credit cards at department stores, etc. If your mortgage interest rate is double digits then REFINANCE!

If you take a standard deduction then great, you should still start with paying down the highest rate cards/accounts and work down from there. It may FEEL good to pay off little balances but you are still shoveling more money out the door than needed. It all comes down to numbers.

 

[DMRick]

I was responding to the person that said not to pay off mortgages, however, I did misread it..I was thinking she was saying at all..but now I see she did say pay them off last. I personally wouldn't take into account the fact they are tax deductible for me..but everyone's circumstances are different.

As for the best rule of thumb to pay off highest rates first, that is not what all planners believe as they try to help people pay down their debt. There isn't a 'rule'. It's different for different people. A lot also plays into if the person who pays off the smaller debt/s will then use that entire payment to pay off the higher interest loans. And it depends on what amount of car loan we are talking about vs how much cc debt. What works for one, may not work for another. If one person has a car payment, and pays off some of their credit card, and needs to purchase something again, they are IMO more likely to just use the credit card again. If they can buy what they need with some of the extra money they have since they no longer have a car payment (although it would take away from the extra payment towards the credit card)..they aren't adding to that credit card debt and getting the cycle going again. I've seen too many people try to pay off the credit card, only to have other debt and they just heap it on the credit card again, because there is no place else to get money from. In a perfect world, where people stay on top of it and stop purchasing..paying off the bigger interest loan is perfect. But that's not what I see.
I think the OP is just going to have to go with what she thinks will work for their circumstance.

Most mortgages are no more than 6%, most consumer debt is in the 15 to 20% debt. The best rule of thumb is pay off the highest rates first. It may feel good to pay off a car with a small balance, but more than likely the car's interest rate is MUCH lower than consumer credit card debt, especially credit cards at department stores, etc. If your mortgage interest rate is double digits then REFINANCE!

If you take a standard deduction then great, you should still start with paying down the highest rate cards/accounts and work down from there. It may FEEL good to pay off little balances but you are still shoveling more money out the door than needed. It all comes down to numbers.

 

[DiznEeyore]

If one person has a car payment, and pays off some of their credit card, and needs to purchase something again, they are IMO more likely to just use the credit card again. If they can buy what they need with some of the extra money they have since they no longer have a car payment (although it would take away from the extra payment towards the credit card)..they aren't adding to that credit card debt and getting the cycle going again. I've seen too many people try to pay off the credit card, only to have other debt and they just heap it on the credit card again, because there is no place else to get money from. In a perfect world, where people stay on top of it and stop purchasing..paying off the bigger interest loan is perfect. But that's not what I see.

I think that's very true, and very wise advice!

 

[sbell111]

Any advice from those who have paid off their credit cards? I'm wondering if we should start with the lowest balance or the highest interest card? Actually, we could pay off my car with a low interest rate in full (not much left on it) OR pay off half of our Visa with a higher interest rate. (It is like 10.40 I think.) I'm thinking it would be wise to put money on the Visa, but then again it might be a mental boost to have the car paid off and one less bill. Thoughts?

You are right on track with your thinking. The reason that the pros tell people to pay off the low amounts first is because of the mental boost. Getting those little debts out of the way shows that progress is being made and keeps people from getting discouraged. The key is that when you pay those small bills off, you must use the 'snowball' those payments against the larger debts every month.

The plan that I suggest to people is slightly different from Dave Ramsey's. Here it is (somewhat simplified):

• Start with a mini-emergency fund of two-months expenses. (Add up your monthly bills (including food, gas, etc) multiply by 2.) Cut up your credit cards. Unless you vow to never again live on credit, this plan will be doomed to failure. Throughout the plan, as you pay off credit accounts (credit cards, credit lines, etc) cancel the accounts. You don't need these credit accounts because you will have actual cash to spend.
• Any bills that are smaller than your mini-emergency fund are tackled first, smallest to largest. Getting these out of the way will give you that mental boost that you'll need and allow you to have traction against the big bills when you 'snowball' them.
• Start 'snowballing' the remaining debt, largest interest rate first, except for student loans and mortgage. (They should fall to last anyway due to their low interest rates. If not, look into refinancing them both. Your interest rates on these are too high.)
• Pay off your student loan, if you have one.
• Adjust your emergency fund to make it cover six months of expenses. (You'll find that this isn't as much as you think, now that most of your debts are paid.)
• Increase you retirement savings to at least 15% of you income. (Generally, the best long-term strategy is to contribute to your 401k at least to your employer's match and then put the rest toward a ROTH, both in a selection of growth stock mutual funds. You'll wean to safer investments as you get closer to retirement. Don't sweat market fluctuations before them. A down market is actually good for us while we are young because it allows us to buy more for less.)
• Pay off your house.

Pay off the high interest rate card FIRST, because when figuring credit scores etc., the car is a SECURED loan on an item, the credit cards are not. SO if you have to apply for something, it will show that you are paying off an unsecured credit card with more than minimum payments. And by paying off the Credit card, you are increasing your credit/debt ratio, which again, is used to compute credit scores. the car will take care of itself, as it shows that you have the ability to pay off a secured loan over time.

I used that method, and now have a score well over 800.

Here's the problem with that logic: It assumes that continuing to buy on credit is a good idea. For most people, holding onto that assumption is a crutch that they will use to never prosper.

 

[patsal]

The pyramid method worked best for me, but that was becasue all things were pretty much within a .5% of one another so the interest rsavings was really not all that great.
It worked well for me to pay of fhte smallest that I owed in full and then apply htat amount to the next highest and so on. What also worked well was once I had allthe small stuff out of the way there was enough to pay down the big one and put a little bit aside in savings to prevent the use of any of the little cards as well. I planned before closing out the accounts and then closed them all at once so the that would hit my credit rating all ast once and be off there all at the same time as well. We have been credit card debt free for the past 11 years and I plan on kepeing it that way.

 

[ctinct]

I am going to throw something out there. A previous poster had pay off your student loan before your mortgage. In my case, my student loan is the LAST thing I will be paying. (I went to school mid-life, so this loan will be around for a while. First of all, at the moment, the interest is, I believe, treated as a tax credit, which is much more valuable than a deduction. Also, I consolidated at a rate that is lower than my mortgage rate.

In my case, my student loan is forgiven upon death. Probably not the case for private loans, but I have a federal student loan. Now, I hope I don't die for a good long time, but if I were to die, my estate would not have to repay the loan. If I put more toward my mortgage, I make it easier for my children to maximize their portion of my assets.

 

[rentayenta]

It assumes that continuing to buy on credit is a good idea. For most people, holding onto that assumption is a crutch that they will use to never prosper.

Truer words were never spoken. You have to get the option of buying things with credit cards off the table!