Pay off credit cards or truck first?

**sweeps** · 02-26-2007, 06:46 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 06:57 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 07:56 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:13 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:19 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:28 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:31 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:35 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:47 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 08:47 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 09:12 AM

Re: Pay off credit cards or truck first?

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

**Diggler** · 02-26-2007, 09:33 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 09:42 AM

Re: Pay off credit cards or truck first?

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** · 02-26-2007, 09:50 AM

Re: Pay off credit cards or truck first?

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.

Pay off credit cards or truck first?