What to pay off first?

[Jasminerk13]

My dh and I are having a "discussion" over what we should pay off first.

1. Credit card with a high balance / high-ish interest rate

OR

2. Student loan with lower balance / low interest rate

OR

3. Car loan with medium balance / med. interest rate

What should we pay off first??

Dave Ramsey argues (I think) that we should pay off the item with the lower balance first... then use that money to pay off higher balance items, etc.
But my husband is arguing that we should pay off the item with the highest interest rate first.

Who is right?

 

[cjnix29]

I would agree with your husband on this one, only because you can deduct the interest you pay on student loans, up to a point, but credit card interest does you no good at all.

 

[JuneChickie]

My dh and I are having a "discussion" over what we should pay off first.

1. Credit card with a high balance / high-ish interest rate

OR

2. Student loan with lower balance / low interest rate

OR

3. Car loan with medium balance / med. interest rate

What should we pay off first??

Dave Ramsey argues (I think) that we should pay off the item with the lower balance first... then use that money to pay off higher balance items, etc.
But my husband is arguing that we should pay off the item with the highest interest rate first.

Who is right?

Your Husband is right in my opinion.

I would pay off the one with the highest interest ,(your credit card)
but thats just me. The higher the interest rate the more money you're
tossing out on the highway. JMO

 

[DVCBELLE]

Lowest balance first and then roll into next balance....like Dave Ramsey says.

DH and I have a debt snowball spreadsheet. You can find them online - put in your balances and interest rates and monthly payments and then it will tell you the order to pay them. We played with the order we were going to pay them and found the one that ends up being the least interest paid.

We weren't convinced until we played with this spreadsheet but it proved Dave Ramsey right...

ETA: I found the link to the spreadsheet...I love that it gives us a plan and tells us when we will finally be debt free!!

http://www.vertex42.com/Calculators/debt-reduction-calculator.html

 

[robb01]

I have to go with your husband, b/c you can deduct up to 2500 i think it is in student loan interest, w/ a credit card you can't do that.

 

[daisax]

Highest to lowest. Snowballing from lowest to highest may make you feel like you're making progress faster, but in the long run, reducing the higher interest debt faster will save you money.

Some people need the minor victories to stay focused, though.

 

[LuvOrlando]

My 2 cents

I can't imagine how Dave Ramsey makes this work, unless he is working for the credit card co's himself

I say absolutely pay off the higher interest rate stuff first. The big thing with credit cards is the rates are fluid, and that puts you at an enormous risk IMO. Lots of people have been dealing with credit card companies arbitrarily raising rates. This can't happen with a fixed rate student or car loan. We just paid off a bunch of stuff and I looked at interest rates when I rated priorities. If you take a look to see exactly how much you are paying in interest EACH month you will be stunned. The little bit I had left on credit I stuffed into a fixed rate consumer loan because they can't do the monkey business CC companies can get away with.

Once you pay off the credit cards then take the extra money and make additional payments towards the principle of the other loans... or create a nest egg with will prevent you from going into credit card debt again.

 

[ontariomonkey]

There would be no hesitation on my part to pay off the highest interest rate first. ESPECIALLY if there is some sort of tax relief on the student loan. Interest is money flushed down the toilet and the quicker you get rid of crazy high CC interest costs, the quicker you can put that money towards the car loans, then on to the student loans. Good luck and it will feel so good when you get everything payed off!

 

[hillview]

Pay off the higher rate ALWAYS.
/hillary

 

[punkin]

My 2 cents

I can't imagine how Dave Ramsey makes this work, unless he is working for the credit card co's himself

too funny (I totally agree with you BTW)

 

[TiredX2]

Highest rate first.

The last I read Dave Ramsey (I'm a voracious reader) he admitted that financially you should pay off highest rate first. If you have problems keeping to a goal, though, of paying off debt paying the lowest balance first may help you keep on track better so is "worth" the extra money to actually get it done. If you can get it done w/out the motivation of seeing the smallest debt paid off first, you should always go highest to lowest rate (unless you think there is a good chance you will be declaring bankruptcy, then you need to protect what you hope to take away from the bankruptcy first, be it house or car or...)

 

[CLR4321]

I agree with your husband also. By paying off the higher rate debt first, this will save you money in the long run that you would have been paying out in finance charges. That money saved from not having to pay out finance charges for as long can be put towards paying down the other debts.

 

[CLR4321]

too funny (I totally agree with you BTW)

 

[Holidaymouse]

You want to pay off the highest percent rate revolving debt first. Do not close the account because it can have a negative effect on your credit score. you then work your way down. Speak to your tax preparer/CPA about the School debt tax deductabilty. Also, remember that revolving debt is priced on a per diem basis (even with a 25 day grace). That means you earn interest on your outstanding debt EVERY DAY. Your fixed debt doesn't compound.

Email me if you are interested in information on how credit works and how to review/check/maintain your credit score.

 

[AmberHeartsDisney]

In my option:

I have to agree with Dave, his system worked for me and now i am 100% debt free! The plans works to you just need to follow it. Pay off the SMALLEST first then onces that is paid you can add that to the Medium level debt and so on.


BTW keeping debt for a tax write off is never a good idea and Dave will tell you that. Id rather be debt free then have a tax write off.

 

[PinkRhombus]

He was talking this over, again, with a caller the other day. So...in my own words though...he said it didn't make that much of a difference if you're hitting this hard and working to pay it off within a year or two.

That it is worth more to get the smallest one out of the way because you're quickly able to have one less bill to worry about.


In regards to the student loan...it only reduces your taxable income by whatever amount the interest is. It does NOT reduce the taxes due by that amount. So you're fooling around with the extra bill only to save...since it's the least of your bills...probably not even $50-$100 on your taxes.

 

[MiniGirl]

I don't think there is a "right" answer. What is right for ya'll is going to be different than what is right for someone else. When I started my climb out of debt, I started with the higher interest rate debt first. Unfortunately, it was also one of my higher balances as well. On my other cards, I was only making payments big enough to cover the interest because I didn't want those balances to go up, and I poured everything else into the higher interest rate cc. After several months, I became so discouraged because I was seeing no progress. I was ready to throw in the towel. Anyway, I decided to try the opposite, and I threw all extra $$ into paying off the debt with the lowest balance first. It was paid off within 2 payments and I took that $$ and put it towards my new lowest balance debt. The progress I saw was enough to make me stick to it, and eventually I had everything paid off. So, FOR ME, paying off the lowest balance was the way to go because that was what motivated me to keep going. I may have paid a little more in interest; but I stuck with it. If I had told myself the only way was to pay off the debt with the highest interest rate first, I'd probably still be in debt because I would've given up.

Oh, and this was over 15 years ago before I had even heard of Dave Ramsey. Maybe I should've written my plan in a book, huh?

Bottom line.... if you can stay motivated and pay off the cc first, then go for it. If you can't, there is nothing wrong about paying off the student loan first.

 

[PrincessDadx2]

As Dave says: mathmatically it is better to pay off the highest interest rate, but if you could do math you would not have credit card debt anyway

If you are current on your bills you can become debt free with the money you currently make by creating a snowball and then getting it rolling by selling stuff, cutting your budget and working extra. You have to get intense.

The problem with paying the large bills is even though you do save some interest you never make a significant enough dent in the bill to get motivated. It just feels like you will be in debt forever and can't get traction.

However, if you stop borrowing money and pay off the smallest bills first every bill you pay off is one that will NEVER return and you are becoming debt free

If you get intense and pay all bills off in 18-24 months the interest difference is really not important. The "stupid tax" of the interest will keep you motivated. What is important is changing your behavior and getting intense.

Dave's plan has worked for thousands because it addresses the root issue, borrowing, and gets people motivated to escape.

I would encourage you to get his book from the library and walk through the baby steps.

 

[Golf4food]

BTW keeping debt for a tax write off is never a good idea and Dave will tell you that. Id rather be debt free then have a tax write off.

True, but not if your options include one that gives a tax benefit and another that doesn't, especially if the one that doesn't has a higher interest rate, as is the case with the OP.

In that case I would completely go with paying the highest rate first. Student loans are, if you can have such a thing, "good debt". Credit cards are bad. Cars somewhere in between. I'd hit them in that order:

Credit Card
Car
Student Loan (espcially if you locked this in while rates were so low - mine is around 2% interest - I can earn more than that in a savings account, so there is no incentive to pay it off early - I'll gladly pay my $100 a month for the next 20 years on it (unless I have the means to just pay it off sooner) and spend my money on other payments in the meantime).