High Interest Credit Card vs. Low Interest

[wizard210]

I'm wondering what I should do with my tax return. I don't have the greatest credit score right now, It's around 630.

Should I pay off my high interest credit cards or my low interest. I know I will be paying off the remaining balance of my target credit card that carries an interest rate of 19.99%.

After paying that off I'll have around 1700 left out of my tax return. I'm struggling on wheather I should throw the rest onto my home depot card that I used to get new windows, or throw it at another credit card, for example a chase card that carries another 19% APR.

[jpg7n16]

Think of it this way: 19.99% interest means the debt costs 19.99 cents/year for every dollar you borrowed. Debt at say 10% costs 10 cents/year per dollar. So the 19.99% card costs nearly twice as much as the 10% card does.

On only $2000, the 19.99% one costs roughly $400/year (that's $33.33/month for interest alone) and the 10% one would cost $200.

So if you could only pay one of them off, would you rather save $400, or save $200?

Or if the balances are somehow different, would you rather save 20 cents per dollar, or 10 cents per dollar?


As an aside, if your tax refund is big enough to knock out a $2k card, you really need to talk to your HR about changing your withholdings. A $2400 refund means you were supposed to be paid $200/month more than you were. (This could help: IRS Withholding Calculator )

[disneysteve]

The biggest bang for your buck will be to pay off the highest rate cards as those are the ones costing you the most money in interest charges each month.

Going forward, you need to correct the situation that caused you to take on all the debt to begin with. If you haven't already, stop spending money that you don't have. If you can't afford the purchase without borrowing money, don't buy it.

[wizard210]

I recieved a tax credit for putting in new windows at my home, so that boosted my return.

Would paying off some of the higher interest cards, boost my credit score?

[creditcardfree]

I don't think which card you pay off matters to your credit score. Having less outstanding debt outstanding is more important to your score along with other factors that you can read about here.

Paying off any of the debt will help! In your case, I'd pick the high interest debt since it saves you money in the long run. Make a plan to pay it all off.

[wizard210]

So what is best. Paying off Highest Interest first or lowest balances first.

Following Dave Ramesey he would say lower balance for those little victories.

Three of my highest debts are on no interest promos right now.

[jpg7n16]

Originally Posted by wizard210

So what is best. Paying off Highest Interest first or lowest balances first.

Following Dave Ramesey he would say lower balance for those little victories.

Three of my highest debts are on no interest promos right now.

They are different methods to accomplish different goals.

The high -> low interest rate method, saves the most money on interest and gets you out of debt the fastest. But it's not the most psychologically rewarding. Sometimes your highest interest rate is one of your higher balances and it takes longer before you get the 'reward' of seeing a balance wiped out. (IMO this is the best method as it can save you $100's to $1000's)

The low -> high balance method, doesn't try to save the most money, or get out of debt fastest. It attempts to maximize the psychological 'reward' of completing paying off debt. For someone who has struggled with debt patterns, this method helps 'reward' paying off the debt, to reinforce the habit of paying off debt.


Sometimes you luck out, and both methods have you pay the same debts in the same order, but not always.


For the high interest method, you can use other psychological techniques to get the same benefits as the low balance method. All you have to do is set up personal markers of your progress on paying down your total debt. Celebrate when you get the 1st $100 paid off, then the first $500, then every $500 after that (just an example). Put one of those thermometers they use in charitable giving, and fill it up as you continue to pay off your balances. Make a chart to graph your progress. Tell all your friends about your goal to be debt free.

Anything that would be rewarding to you to stay encouraged as you work your way out.

Just don't go into debt to celebrate getting out of debt

[JoshuaHeckathorn]

Originally Posted by wizard210

So what is best. Paying off Highest Interest first or lowest balances first.

Following Dave Ramesey he would say lower balance for those little victories.

Three of my highest debts are on no interest promos right now.

I'm with the others that recommend paying off the highest-interest debt first, but I'm not the type of person that needs "little victories". What speaks to me is saving the most I possibly can on interest charges.

[littleroc02us]

Originally Posted by JoshuaHeckathorn

I'm with the others that recommend paying off the highest-interest debt first, but I'm not the type of person that needs "little victories". What speaks to me is saving the most I possibly can on interest charges.

What that usually means to me personally is that you are planning to have the debt around for a long time while you pay it off, if your worried about interest charges. I prefer the lowest debt to highest. It's kind of like a car rolling down a hill, it picks up speed the further it goes.

[disneysteve]

Originally Posted by littleroc02us

What that usually means to me personally is that you are planning to have the debt around for a long time while you pay it off, if your worried about interest charges.

You are really channeling DR today, aren't you?

This simply isn't true. Paying highest rate to lowest rate retires the debt FASTER, not slower, because more of your money goes toward principal and less toward interest. So if you want the method that will have you debt free the quickest and at the lowest cost, do this. If you need the psychological motivation, however, and some people do, then do the lowest amount to highest amount. Both ways work so choose the route that keeps you motivated and on track.

[littleroc02us]

Originally Posted by disneysteve

You are really channeling DR today, aren't you?

This simply isn't true. Paying highest rate to lowest rate retires the debt FASTER, not slower, because more of your money goes toward principal and less toward interest. So if you want the method that will have you debt free the quickest and at the lowest cost, do this. If you need the psychological motivation, however, and some people do, then do the lowest amount to highest amount. Both ways work so choose the route that keeps you motivated and on track.

I guess I'm speaking from personal experience. I was a mess until I tried the debt snowball idea. In my early 30's I thought I could buy everything on credit and pay it off, transfer balances from card to card and pay off the largest debts with the largest interest rates, but it just turned into a huge mess.
Yes I did get on the debt snowball program and busted 50k in debt in like under 4 years and am still debt free. I wasn't worried about interest, just being debt free. It happended and I don't ever plan on going back. This was my experiece with it and that's why I advise people to do it, because I'm living proof that it works.

[disneysteve]

Originally Posted by littleroc02us

I guess I'm speaking from personal experience. I was a mess until I tried the debt snowball idea. In my early 30's I thought I could buy everything on credit and pay it off, transfer balances from card to card and pay off the largest debts with the largest interest rates, but it just turned into a huge mess.
Yes I did get on the debt snowball program and busted 50k in debt in like under 4 years and am still debt free. I wasn't worried about interest, just being debt free. It happended and I don't ever plan on going back. This was my experiece with it and that's why I advise people to do it, because I'm living proof that it works.

It absolutely works and I commend you for accomplishing it. As I said, both methods work. Both ultimately reach the same end - freedom from debt. One way is more motivational. One way is more mathematical. One way costs a little more. One way costs a little less. Whichever way works best is the way you should use. We aren't all the same. We don't all need the same type of motivation. When I was in debt, I didn't care if I had one loan or six loans. I just wanted to see my overall combined balance going down each month. I added them all together and followed the bottom line. And I did focus all extra payments on the highest interest debt first. That motivated me more than seeing the little debts drop away but still be facing the biggest ones. In the end, it's all good.

[JoshuaHeckathorn]

Originally Posted by littleroc02us

What that usually means to me personally is that you are planning to have the debt around for a long time while you pay it off, if your worried about interest charges. I prefer the lowest debt to highest. It's kind of like a car rolling down a hill, it picks up speed the further it goes.

Nope- just worried about retiring the debt in the fastest way possible mathematically. I won't beat the dead horse though. DS has covered the issue eloquently.

[couchrobt]

Originally Posted by disneysteve

It absolutely works and I commend you for accomplishing it. As I said, both methods work. Both ultimately reach the same end - freedom from debt. One way is more motivational. One way is more mathematical. One way costs a little more. One way costs a little less. Whichever way works best is the way you should use.

Exactly. We can actually use whichever way that would work well according to our lifestyle, and according to how much we earn. The ability to pay the debts off is not as hard as we thought it would be as long as you have the focus to really be debt-free.