Pay off credit cards or truck first?

[Diggler]

We have quite a bit of credit card debt and a truck payment. The truck payment is pretty low interest, but has a balance of $5200 and a payment of $452 a month.

All the cards are gone. No more credit card debt will be accrued, period. We're going to pay all of our debt off.

We have several high interest credit cards and I'm planning on attacking highest interest first... but my question is when should I pay off the truck.

If I go strictly with paying off the highest interest debts first, the truck debt will die a natural debt at the end of its term, about a year from now. However, I think I could pay it off completely in less than four months. That would give me an additional 8 months of being able to apply another $452/month towards the credit card debt.

Would it be wise to pay off the truck first in order to free up more capital quickly to pay off the other debt?

[sweeps]

Financially you're better paying all you can towards the credit card debt first (highest interest rate working your way down from there).

Psychologically you may benefit from paying off the truck since you can get rid of it quickly. But the benefit is only psychological.

[jIM_Ohio]

The free cash flow from paying off the truck will help you.

But overall, your money works "best" attacking highest interest rate debt first. Have you looked at consolidating CC debt to another card with a lower interest rate? Most CC debt could be consolidated to 0-7% if you have reasonable credit.

[creditcardfree]

I like your plan and jIM Ohio makes a good point about surfing your cc money around to lower interest rates while you are paying them off. What are the balances and interest rates on your credit cards? Are any of them lower than the truck balance?

I would probably look to pay off the lowest balance first regardless of interest rate, because I do like how it feels to get a debt paid off.

[jIM_Ohio]

Originally Posted by creditcardfree

I like your plan and jIM Ohio makes a good point about surfing your cc money around to lower interest rates while you are paying them off. What are the balances and interest rates on your credit cards? Are any of them lower than the truck balance?

I would probably look to pay off the lowest balance first regardless of interest rate, because I do like how it feels to get a debt paid off.

I agree with this IF repayment of all debt would be greater than 2 years.

If you've figured out that within 18 months most debt is gone (paying highest rate first), get your money working for you on the high rate debt.

Psychology is important if debt payoff is a long time (5-30 years). That 2-5 year period is gray... but if less than two years, the interest you save should be the best psychology you could ask for (IMO).


I have done both ways (smallest principal and highest rate) depending on the situation needed.

[Diggler]

The credit card rates range from 13% to around 25%. There is one that my wife was late on that went to 29%, but it's only $700.

Total balance of credit cards is about $50k. I make decent money though so I think I could get it paid off within a few years.

I don't need the 'incentive' of paying off lower balances first; I am results oriented and am tracking my overall debt in Quicken. I want to see the balance fall as quickly as possible.

No matter what, I'm going to pay minimums on everything except the bill I'm currently targeting. The thing that makes the truck payment different in my mind is the high monthly payment. If the truck payment was instead a $5200 credit card balance, I'd only have to pay about $90/month minimum payment and the rest of it ($360) would go towards the targeted high-interest credit card bill.

I am planning on tranferring as much as I can to 0% or other low-percentage cards ASAP but it won't consolidate all of it.

I guess the thing is, in the grand scheme of things is it worth starting now and paying $1000/month for maximum credit card payments for 12 months, or is it worth waiting 4 months before starting to pay aggressively towards the credit cards in order to be able to pay around $1500/mo for the 8 months I would normally have had to pay truck payments?

[LuxLiving]

Have you an emergency fund? Even if you are a high income earner a bit o' cash stuck back can't hurt you too badly!

Have you considered moving your truck balance to a 0% credit card?


Pay now - avoid any unnecessary bleeding (interest) to the CC companies.

[autoxer]

Originally Posted by Diggler

I guess the thing is, in the grand scheme of things is it worth starting now and paying $1000/month for maximum credit card payments for 12 months, or is it worth waiting 4 months before starting to pay aggressively towards the credit cards in order to be able to pay around $1500/mo for the 8 months I would normally have had to pay truck payments?

Either way you do it, after one year the car is paid off & the credit cards balance is down $12,000. I would keep focusing on the highest interest rate.

[jIM_Ohio]

Originally Posted by Diggler

The credit card rates range from 13% to around 25%. There is one that my wife was late on that went to 29%, but it's only $700.

Total balance of credit cards is about $50k. I make decent money though so I think I could get it paid off within a few years.

I don't need the 'incentive' of paying off lower balances first; I am results oriented and am tracking my overall debt in Quicken. I want to see the balance fall as quickly as possible.

No matter what, I'm going to pay minimums on everything except the bill I'm currently targeting. The thing that makes the truck payment different in my mind is the high monthly payment. If the truck payment was instead a $5200 credit card balance, I'd only have to pay about $90/month minimum payment and the rest of it ($360) would go towards the targeted high-interest credit card bill.

I am planning on tranferring as much as I can to 0% or other low-percentage cards ASAP but it won't consolidate all of it.

I guess the thing is, in the grand scheme of things is it worth starting now and paying $1000/month for maximum credit card payments for 12 months, or is it worth waiting 4 months before starting to pay aggressively towards the credit cards in order to be able to pay around $1500/mo for the 8 months I would normally have had to pay truck payments?

I actually believe high car payments are a requirement... makes sure person can afford the financing. My car payment is $700/mo. Each time we get one we finance for one year less. It's a Honda, nothing extravagent.

29%. YIKES. 18% just as bad. Here's a thought.

1) consolidate to one card, make payments on that one card
2) 401k loan to pay off them all. if you have $700 type debts all over the place, your money will be working for if the are consolidated to a lower interest rate.
3) If you planned to use the truck payment to snow ball the other debt... there is some logic to paying off the lower principal debts to do the same thing. I call this "low hanging fruit"- solve using easiest debts to pay off.

I would not go after car before credit cards... car is fixed rate and 29%, 18% is BAD.

jIM

[Scanner]

You hit the 2 schools of thought:

School 1: The By-The-Numbers-School

You take the highest interest rate and work your way down to retiring the debts. You avoid refinancing because it can re-extend the terms of the balance. However, if the term is reasonable, refinancing isn't totally off the table.

School 2: The Psychological School

You take the smallest balance, and retire that first. You keep making the same monthly payment and work your way up to the next larger balance and so on and so until the loans are satisfied.

Both schools of thought have their merit. You just decide which is best for you.

At 50K of c/c debt, my inkling would be school 2 - someone in your family has a consumption problem, especially if you make decent money like you said.

Good luck.

[sweeps]

I know it seems intuitive that if you pay off the lowest balance first, that would free up more money so you can pay off other debts faster.

Unfortunately it's usually not the best course of action. In fact it can backfire sometimes because the extra cash flow can be tempting to spend instead of rolling into other debt.

Start with your sky-high 29% and work your way down from there based on (effective) interest rate.

[Ima saver]

I would pay on the credit cards, highest interest first!

[Diggler]

My wife had the consumption problem. It has been handled; I have 'nationalized' my family's finances, the credit cards have been seized and I have assumed the throne of the benevolent dictator.

[LivingAlmostLarge]

Hmmm..wish I were a benevolent dictator, I think we're more like president and CEO and neither of us like the other sometimes!

[jIM_Ohio]

Originally Posted by Diggler

The credit card rates range from 13% to around 25%. There is one that my wife was late on that went to 29%, but it's only $700.

Total balance of credit cards is about $50k. I make decent money though so I think I could get it paid off within a few years.

50k in debt... WOW. I've climbed iout of 10k 3 times, one time approached even 20k.

Do you have a goal set (50 k paid off in 5 years for example?). The longer this debt takes to get paid off, the more I think of a few things:

snowballing (lowest principal balance) is a good way to get started.
10k/year is ~800/month. I like dealing with life in 5 year increments which is why I suggest paying off within 5 years. But I could understand the sticker shock from this.

Is the truck included in the 50k?

Have you worked up any spreadsheets/timelines for this?

In a spreadsheet I would list each bill seperately, with an estimated payoff date (based on what you can afford to pay). Interest rates, minimums.

Then after estimates, I create a timeline. A month by month payment schedule to see where "snowballing" helps.

It might make sense, for example, to pay off 3-4 $700 balances quickly, pay off truck at same time then go after a 20k balance, then smaller debts again or something else...

I went through this one time because I needed my "ratios" for a house purchase to be somewhere better, so I needed to free up money... even though it made more financial sense to payoff higher rate debt and screw the ratio.

Another advantage of paying off smaller balances is it might raise credit score, which could help you consolidate loans on a new card you acquired for this purpose (with a lower apr because of an improved credit score).

Anyways, do what you see fit, just offering commentary if needed.

[Diggler]

The truck isn't part of the $52k.

There are 10 credit cards (mostly store cards) with APR's of over 20%.

8 of them have balances under $1000. Four of them are under $400.

So the 'snowball' method is going to occur whether I start with high interest or low balances.

The other two >20% cards are $5100 and $3200. Prime candidates for consolidating on another card.

My wife was the spender; I have been frugal. I almost always take leftovers for lunch, only buy what I need, I've trimmed as much as I can out of my every day life to maximize my cash flow.

I haven't figured out any timelines for this. I am simply going to put everything I can, for as long as it takes, into debt reduction. After this first month I should have a decent idea, but I think I can get at least an extra $1k/month towards bills.

[disneysteve]

If 8 of 10 cards are under $1,000, and the other 2 are 5K and 3K, that's only 16K or so. What about the rest of the 52K?

I don't normally support getting a new CC, but in your case, it might help a lot if you could qualify for a low interest new card. It would help you get debt free a lot quicker.

[jIM_Ohio]

1k/month is 12k a year. This will take 4 years.

adjust this as needed

Bill 1 $400 15% minimum payment $15
Bill 2 $400 15% minimum payment $15
Bill 3 $400 15% minimum payment $15
Bill 4 $400 15% minimum payment $15
Bill 5 $700 15% minimum payment $75
Bill 6 $700 15% minimum payment $75
Bill 7 $700 15% minimum payment $75
Bill 8 $700 15% minimum payment $75
Bill 9 $3200 20% minimum payment $100
Bill 10 $5100 20% minimum payment $100

this is ~10k in total balances, so I know I have guessed wrong by ~40k?

I think the $700 might make sense to target first. Here's why:

you get the $75 each month freed up (or whatever that minimum payment is). Within 4 months, that's $300 extra you freed up (the $75 payment*4 months). This freed up money is the "snow ball".
within a month after the $400 goes away.
4 months later the $400 are done with. You would have $75*4+$15*4 freed up. The snowball is now bigger. Then attack higher rate cards...

It does not make sense to me to put 7 balances of 400-700 one one bill, unless the minimum payments on each of these prevents you from snowballing one bill per month.

For example, if the $1000 you have budgeted can pay off one bill per month and make minimums on others, that makes most sense to me. Don't consolidate in this case.

In another example, if the $1000 budgeted gets the minimums on everything, but would take 4 months to pay off a $400 balance (because minimums are so high), then consolidation is going to put you ahead.

Have you called the CC companies to lower the rate? See if they'll freeze the rate for 12 months while you get situation under control. Any time you can buy to get the low balanced paid off should help you. Most companies will lower their rates to make sure they get money.

If you suggest you will be consolidating to a lower rate, make sure you have a card to consolidate to, and know the banks make money if they keep your balance.

[Diggler]

The rest of the $52k is on cards with rates below 20%.

I have an application on my desk at home for a 0% no transfer fee that I'm going to use right away. I'll probably take care of the $700 bill at 29.99% myself right away, and put all I can from the other >20% cards, starting with the highest balance first, in the 0% card and then work my way down the interest rates.

ALL the high interest cards are in my wife's name. The card companies know they have her where they want her and won't work with her at all. She cancelled some of them to freeze rates and they won't even allow her to do online payments 'because there is no account anymore...' B.S... I just set it up through my bank to do online e-payments for free. They're trying to bait her into late payments.

ETA: there are TWENTY cards all together; four of them are zero percent already (two of them are mine... I personally don't have any interest-charging accounts in my name).

ETA II: My job also affords me a bonus every September, it is almost ALWAYS going to be at least $7k after taxes. So that's going to help a lot.

[jIM_Ohio]

Originally Posted by Diggler

The rest of the $52k is on cards with rates below 20%.

I have an application on my desk at home for a 0% no transfer fee that I'm going to use right away. I'll probably take care of the $700 bill at 29.99% myself right away, and put all I can from the other >20% cards, starting with the highest balance first, in the 0% card and then work my way down the interest rates.

ALL the high interest cards are in my wife's name. The card companies know they have her where they want her and won't work with her at all. She cancelled some of them to freeze rates and they won't even allow her to do online payments 'because there is no account anymore...' B.S... I just set it up through my bank to do online e-payments for free. They're trying to bait her into late payments.

ETA: there are TWENTY cards all together; four of them are zero percent already (two of them are mine... I personally don't have any interest-charging accounts in my name).

I remember my wife and I having this discussion... I actually took her balances onto my cards before we married because my rates were better than her offers.

Good move with the 0% offer. Highest balances with highest rates first (look at the minimum payments for this info).

best of success to you.