Which CC to Pay off?

[fi46re129]

Suze Orman.. who I love and trust the financial advice of would recommend paying down highest interest with highest balance and then down from there she would also say NEVER close a credit account! Simply cut up the card and be sure not to order a new one! Closing can decrease your credit to debt ratio and make a ding at your credit... credit to debt ratio is say you have 4 credit cards and combined you can have a max balance of 1500 (if all cards were maxed out) but you only have 500 total on all the cards combined.. this shows good credit to debt ratio... that you have it but dont really use it.. this will help you when it comes time to buy another home.. good luck I have been working at becoming debt free as well.. I love it when a card gets to 0!

 

[ICF]

Again if you try it out and don’t like it you can always go back into debt…

are you saying that you either use the Dave Ramsey method or end up in debt?

 

[sdoll]

I would like to add - take the CCs put them in a small plastic bag, then put that into a bigger bag add water & put in freezer
then you have to defrost to use
have something around the card so you can't see all of the numbers so no online buying either
while you waiting for the cards to defrost you can rethink about using them

Funny!! I just did that this week

 

[Jeff_G]

are you saying that you either use the Dave Ramsey method or end up in debt?

No I'm saying if one method doesnt work try another....

 

[Nicolepa]

How about this, let’s say you have a $200k 30 year mortgage running at 5.5% interest, you also have a $10k credit card bill running 4% interest.

You just found out you won the Nigerian lottery and will receive $10,000 (after you send them a check for $1000 to release your money from their customs department). So assuming your $10,000 shows up an your bank account is not emptied, where would you put that $10,000.

Numbers would say put the 10k down on the mortgage because that will save you the most money. If you put the 10k down on the credit card you will only save $133.33 a month or $3,130.08 in interest but you would save 304 months of payments ( paying the minimum). It sort of boils down to tolerance for risk, what is more risky 10K of credit card debt or 10K more on your house?

It’s fun to think about these things and agree most people’s finical advice being given / sold is geared to the masses…

Well, in that senario I would put the $10K in my childs college fund. At 4% I can at least match the stock market so it is a wash to worry about paying off $10K in imaginary credit card debt.

 

[stargazer2892]

Dh and I are in the process of buying a house and our "loan guy" told us to pay the highest APR first then get the balances under 30%. This way your paying off the worst APR and getting the biggest boost to your credit. Which is never a bad thing. From there DH and I are paying off our lowest balance first that way it's an easier goal to obtain and there's more momentum in paying off the debit.

 

[kiddo76]

How about this, let’s say you have a $200k 30 year mortgage running at 5.5% interest, you also have a $10k credit card bill running 4% interest.

You just found out you won the Nigerian lottery and will receive $10,000 (after you send them a check for $1000 to release your money from their customs department). So assuming your $10,000 shows up an your bank account is not emptied, where would you put that $10,000.

Numbers would say put the 10k down on the mortgage because that will save you the most money. If you put the 10k down on the credit card you will only save $133.33 a month or $3,130.08 in interest but you would save 304 months of payments ( paying the minimum). It sort of boils down to tolerance for risk, what is more risky 10K of credit card debt or 10K more on your house?

It’s fun to think about these things and agree most people’s finical advice being given / sold is geared to the masses…

When advising to pay lowest interest off first, we were comparing 'like' debt. You can't compare mortgage debt vs. credit card debt in the same way. There are other factors to take into account. Mortgage interest is tax deductible, credit card debt is not. Mortgage is a secured debt, credit card is unsecured. Paying $10K on your mortgage likely won't help your credit score much, but putting it towards credit card debt most likely will.

With all things being equal except interest rates, you will get out of debt sooner and pay less if you pay down the higher interest rate first.

Like Nicolepa said, with such low interest rates on those debts, I would probably try to see if there was somewhere I could put that money to make more interest than what I've been paying out.

 

[brerrabbit]

Bingo! kiddo76 gets it as should a lot of other people. Too much debt that you cannot manage is bad. But not all debt is bad. DR followers I know have told me he advocates paying your house off asap too. That might be some of the worst advice I have ever heard. While in very limited cases that might make sense in general it does not make sense. Lets say you have a 30 yr loan at a 5.5% interest rate. You have a good investment guy who has consistantly returned you 10% a year. For every $ you throw at the mortgage you are giving up 4.5% return on that dollar. If you pay off your house at the sake of investing in other things then guess what? You are close to 100% invested in real estate. That real estate being your house. To many look at the house and fail to realize that more than a place to live it is an investment as well. As in every case you have a choice of things to invest in and your house is just one of them.

And before everyone jumps up and down about how bad the market is and where can you get that kind of return remember this. Since the inception of the New York Stock Exchage, the average annual return for the market in total has average 13% a year. Now certainly you won't make that every year but you will certainly come close over the course of a 30 year mortgage.

 

[ICF]

. Too much debt that you cannot manage is bad. But not all debt is bad.

EXACTLY.....

I also feel that way about credit cards. They arent the problem, it's people that dont know how to manage money that are the problem when they try to use them. CC's with no fee's that offer rewards are great and a way to lots of free stuff as long as you pay them off each month.

 

[kiddo76]

EXACTLY.....

I also feel that way about credit cards. They arent the problem, it's people that dont know how to manage money that are the problem when they try to use them. CC's with no fee's that offer rewards are great and a way to lots of free stuff as long as you pay them off each month.

Yes, I love my cash back rewards card. Nothing like making money while using someone else's money.

 

[disneygirl 17]

You need to pay the smallest off first then all of the payment that you had been making to it needs to go to the the next smallest. Note how much you are paying to each card now & you can not change that amount unless you pay more to them.
let's say card A was getting $100
card B was $200
card C was $400
so you have been paying $700 a month to all CCs
now you pay off card A
so card B now gets $300 until it is paid off
card C stays at $400 (I don't care that the mini is now down to $350 it still gets the $400) until card B is paid off then it gets the whole $700
after that card is paid off, so you have no CCs left then you start on paying off your house/car with the $700 on top of what you were paying until all debt is gone.
then it all goes into the Disney fund

I agree with this - Dave Ramsey fan here as well.

 

[bettymae1121]

EXACTLY.....

I also feel that way about credit cards. They arent the problem, it's people that dont know how to manage money that are the problem when they try to use them. CC's with no fee's that offer rewards are great and a way to lots of free stuff as long as you pay them off each month.

Sometimes reward CC's with fees are worth it too. My airline mileage CC is $65 a year but I earn enought miles to get one free domestic airline ticket a year with that, so I'm still ahead of the game.

 

[Nicolepa]

Bingo! kiddo76 gets it as should a lot of other people. Too much debt that you cannot manage is bad. But not all debt is bad. DR followers I know have told me he advocates paying your house off asap too. That might be some of the worst advice I have ever heard. While in very limited cases that might make sense in general it does not make sense. Lets say you have a 30 yr loan at a 5.5% interest rate. You have a good investment guy who has consistantly returned you 10% a year. For every $ you throw at the mortgage you are giving up 4.5% return on that dollar. If you pay off your house at the sake of investing in other things then guess what? You are close to 100% invested in real estate. That real estate being your house. To many look at the house and fail to realize that more than a place to live it is an investment as well. As in every case you have a choice of things to invest in and your house is just one of them.

And before everyone jumps up and down about how bad the market is and where can you get that kind of return remember this. Since the inception of the New York Stock Exchage, the average annual return for the market in total has average 13% a year. Now certainly you won't make that every year but you will certainly come close over the course of a 30 year mortgage.

This is one of the areas that I disagree w/Dave, for the reasons you list. Housing debt is not bad if you can afford your house. I live in a very nice house, but my mortgage is less than 1/2 of anyone I know in my neighborhood.

I also disagree w/never using a credit card. It is credit card DEBT that is the problem. We put everything on our credit cards, get the rewards, pay 0% interest of the year. If you can't control what you are putting on your card then, by all means, you shouldn't use them.

 

[brerrabbit]

I have a friend that took the DR course through our church with his wife. They have done well adhering to the program and now have no CC's. Since then he has complained a couple times about paying for things on line or over the phone with his debit card because they take the money right away and he has had a couple problems with products and he has had problems getting his money back. One of the values I see with CC is witholding payments to get resolution of issues.

The other day we got to talking about mortgages and with his DR mindset he proceeded to tell me that it is not fair that you pay so little principle on your house initially and how much easier it would be if you could have more of you payment go to principle. I said you can, just pay extra every month. His response was no, I mean if you pay $1,000 a month and $100 is principle and $900 interest the government should pass a law to make it $900 priniciple and $100 in interest. I told him it would never happen. He said sure it could happen all the government has to do is pass the law. Being a finance major I pulled every stop out to explain how the mortgage market worked and nothing could convince him. I finally put it this way. I said if you took $100,000 of your own money and bought government backed t-bills at a 5% return rate for a 30 year term, how much would you want to get back after 30 years? Since I did not have a calcualtor I said lets say the numbers suggest you should have the $100k plus $150k in returns. You would want $250k right, to which he said of course. I then asked well why do you think someone who loans you $100k to buy a house should expect less? (obviously simple comparison that is not completely valid because with a house you have a decreasing principle but it was for illustration puposes only) He sort of said okay, but.....

He really did not think this way till after the DR class. If DR says it, it must be true so he said they have to pay off their house and get rid of cc's. Two decisions I cannot get him to change his mind about.

 

[nrpofp]

Bingo! kiddo76 gets it as should a lot of other people. Too much debt that you cannot manage is bad. But not all debt is bad. DR followers I know have told me he advocates paying your house off asap too. That might be some of the worst advice I have ever heard. While in very limited cases that might make sense in general it does not make sense. Lets say you have a 30 yr loan at a 5.5% interest rate. You have a good investment guy who has consistantly returned you 10% a year. For every $ you throw at the mortgage you are giving up 4.5% return on that dollar. If you pay off your house at the sake of investing in other things then guess what? You are close to 100% invested in real estate. That real estate being your house. To many look at the house and fail to realize that more than a place to live it is an investment as well. As in every case you have a choice of things to invest in and your house is just one of them.

And before everyone jumps up and down about how bad the market is and where can you get that kind of return remember this. Since the inception of the New York Stock Exchage, the average annual return for the market in total has average 13% a year. Now certainly you won't make that every year but you will certainly come close over the course of a 30 year mortgage.

I completely agree with you. My mortgatge s fixed at 4% and less than 10% of our income. I would never pull money out of our stock investments to pay it off. It makes no sense.

 

[nrpofp]

This is one of the areas that I disagree w/Dave, for the reasons you list. Housing debt is not bad if you can afford your house. I live in a very nice house, but my mortgage is less than 1/2 of anyone I know in my neighborhood.

I also disagree w/never using a credit card. It is credit card DEBT that is the problem. We put everything on our credit cards, get the rewards, pay 0% interest of the year. If you can't control what you are putting on your card then, by all means, you shouldn't use them.

I agree credit cards are not bad there actually a great convenience and a great way to earn free stuff. They are also safer than a debit card. I charge over 25,000 a year and have no cc debt. I have a hard time believing Dave Ramsey functions without a credit card.

 

[disneybound31]

We also fall into the category of those who use cc's for the rewards and never carry a balance. It is amazing what experiences one can amasse if you stay on top of things...right now I have 4 free hotel stays, gas gift cards, Disney giftcards, various restaurant giftcards and at least $60 Disney reward dollars...all for ZERO cost to me. And that is just the past 9 months--all told I am sure that we have enjoyed at least a couple thousand $'s worth of free cc perks over the years.

Even though we recently cancelled our upcoming WDW Xmas trip I can still use those Disney rewards/giftcards to buy Xmas presents for all the kids in our extended family and lessen our Xmas cost.

We recently took a mini-vacation and our only cost was the McDonalds our kids wanted to eat lunch at and my souvenier fridge magnets I must have from every new destination!

 

[Nicolepa]

I have a hard time believing Dave Ramsey functions without a credit card.

He (& his company) do function w/o a credit card. The difference between DR & 99% of the population is that he can afford to pad his checking account. So he does not have to worry about being billed incorrectly, or refunds not being returned in a timely matter, or if they put $1000 hold on his account when he checks into a hotel.

The average Joe cannot afford to do that.

 

[ambertides]

Paying the highest interest rate first is obviously going to save you money if you can stick with it. For me, paying a card off is just one less data entry point when I pay bills, which saves time/hassle/worry, which makes me lean towards smaller balance cards first. It really just depends on temperament which is better for you.

For us, each time we pay off one card, we decide which to pay off next and our reasoning varies. The last we paid off had a really high monthly minimum, and paying it off gave us more breathing room. Right now we are paying on the account that was no interest for x amount of time to avoid the built up interest charges getting plunked on to the end (Christmas debt spending on DH's part ). After that I think we're going to knock off all the smaller balances that have annual fees attached.

We started out $26k in debt (including student and auto loans). Now we're at 17k. And are projected to be out of debt by the middle of next year at the latest (barring unforeseen circumstances).

We also use YNAB for budgeting, which helps us stay on track. Also, we don't budget every last penny to debt payments. That so increases the potential for us to feel overly deprived and go on a spending spree (on a credit card, most likely). We each get $25 a month budgeted to spend however we want.

We did cancel two vacations we had planned this year to get out of debt sooner, though.

It's all a balancing act. I can't wait until we are done!

 

[Marionnette]

DR followers I know have told me he advocates paying your house off asap too. That might be some of the worst advice I have ever heard.

Paying off the mortgage is Baby Step #6 out of 7 steps. It comes well after the advice to invest 15% of your income in a Roth IRA and other pre-tax retirement funds (Baby Step #4) and starting the kids' college funds (Step #6). DR is not the only one to encourage people to pay off the mortgage early. Suze Orman also advises her followers to get it paid off before retirement.