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I am a student and get minimal financial aid... So I guess I have been using credit cards a lot to meet those tuition hikes... I, however, am proud to say that over the course of 5.5 years of school, only owe about $5,000.00---which is less than the average student owes after about the same amount of time. Now the bad news... The debt is distrubuted over NOT 1, NOT 2, NOT EVEN 3, BUT 4 CREDIT CARDS with varying interest rates ranging from 14% to 21%. Needless to say the card at 14% is maxed out except for 100, which I am afraid to use up in fear that I might look desperate to my creditors :-). I also have a 5th card with a $200.00 limit that I use from day to day but which I pay in full at the end of the month... I know, I am trying not to use it as much, but I find that IF I use it and pay in full at the end of the month, that I get some extra money "float" in my interest bearing checking account... Basically, I see this card as an interest free loan which I use to get interest at my bank (the revenge of the consumer!! lol)...

Anyway, I was wondering what would be the best method for payment... What is this snowball method of payment that I hear so much about in this board?

I devised a method of payment that I think is sound, please let me know what you think of it... It is based on the assumption that I want to minimize, NOT the interest that I get charged, but the total amount of money that I get charged by all the credit cards combined... I devised my plan based in the follwoing scenario:

Having two cards, one with a debt of 10,000 at an interest rate of 10% (per month, to make it easy) and another with a debt of 1,000 at an interest rate of 20% (per month, to make it easy). Suppose that you have 100 dollars extra left after paying the minimums in the cards. Conventional wisdom would be to pay it all to the card with the higher interest rate, reducing the debt to 900, while leaving the other debt as it is (remember the minimum was already payed). The next month I would owe, respectively: 11,000 at 20% and 1,080 at 20%. The problem that I saw with this scenario is that while the bigger card had the smaller rate, since it was so much bigger than the smaller card, it accumulated more debt more quickly. I accumulated a debt of 1,000 on the bigger card (which will compound even more quickly because I will pay only the minimum on that account until I finish paying off the smaller card) whereas I was charged 180 in the smaller card. Assuming that I have 100 extra each month to pay off debt, I will be chipping away at the smaller card, YES, BUT I will not be chipping away at the big debt, which will only get bigger, even though it has a smaller rate.

So, my plan is teh following...

Pay a set amount of money, say 200 each month no matter what (well, unless you are in a death-life situation and need the money to get the medical treatment of the brain operation you are about to have...).

Pay the monthly minimum first...

Then, with the extra money left, I will pay some portion to the big card, and some portion to the small card... an the portion will be determined as follows... Since the money that gets added to the debt is interest*principal, I will work with those numbers instead of working with interest or principal only. I want to know just how much bigger is my debt with the bigger card... I sort of need to to know how much money is getting added to the debt in percentage points... So I calculate that as follows (A denotes card A and B denotes card B; I=interest; P=principal):

(IA*PA)/(IA*PA + IB*PB) = QA = percentage debt being added by card A

(IB*PB)/(IA*PA + IB*PB) = QB = percentage debt being added by card B

Actually, they are not quite percentages because I have not multiplied by 100, they are ratios of debt instead of percentages of debt, but that's a fine point.

Now to the fun part. Whatever extra money I have left after paying the monthly minimum (say it's X) I multiply for the ratios that I just calculated above, and then i add the minimum to get what I will pay that month for each credit card:

X*QA + minimum A = payment A
X*QB + minimum B = payment B

I run out of time, so I cannot continue with how this formula will affect my example, so I have to leave... But you get the idea... Let me know what you think of my method... and whether there is a better one available... or whether my mathod is seriously flawed in some way....

So... Thank you and bye...

Hoping to be debt free in 2 years....

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