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Author: FlippoHip Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308547  
Subject: Finish paying off one, or start on the other Date: 8/22/2012 1:28 PM
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I have been going full steam into the "getting out of debt" process.

I have two credit cards to go. I manage to pay one down to about 1/2 of what it was.
The other one, however, has the larger balance and I am paying about $100 a month in interest as opposed to $30 on the smaller one.

I have been thinking about just going back to paying the minimum on the smaller one now, and hitting the larger one full force.

I know Dave Ramsey says pay the smaller one off first, but that $100 a month is really getting on my nerves.

If it was your debt, what would you do?
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Author: bill343 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305781 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 1:54 PM
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I would be inclined to make a hard run at the one which is costing me the most money.

Particularly if it is issued by an Obnoxious Issuer.

bill

but be sure not to neglect the little guy

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Author: legalwordwarrior Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305782 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 3:07 PM
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I have been thinking about just going back to paying the minimum on the smaller one now, and hitting the larger one full force.

Which will save you the most money in the long run? If you can pay the minimum on the $30/mth for awhile and get the larger balance down to the point that the interest per month drops to near that amount, it might be a good idea to attack the larger debt for awhile until you get them both easily manageable. $100/mth for interest would drive me crazy!

LWW

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305783 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 6:25 PM
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If it was your debt, what would you do?

Unless the interest rates for the accounts are significantly different, pay the one that is bothering me the most. What keeps you motivated to pay off debt and minimizes your stress is the best for you. It doesn't matter what is best for someone else.

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Author: determinedmom Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305785 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 6:31 PM
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You haven't given the crucial information which is what is the interest rate on each card. For example, one card might have $100 a month in interest but at a lower rate than the card with only $30 a month in interest. If there is a difference in interest rates I would be inclined to pay off first the one with the highest interest rate.

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Author: FlippoHip Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305787 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 10:04 PM
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You haven't given the crucial information which is what is the interest rate on each card. For example, one card might have $100 a month in interest but at a lower rate than the card with only $30 a month in interest. If there is a difference in interest rates I would be inclined to pay off first the one with the highest interest rate.

That isn't very crucial for this equation. Both are low rates and they are within a percent of each other. The $100 a month is always going to cost more than the $30 a month though. That's simple math. The interest rate is irrelevant at this point. I simply have a much, much higher balance on the big one. If the monthly interest payment was close, then interest rate would be a factor.

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Author: Windowseat Big funky green star, 20000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305788 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 10:16 PM
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If they're that close, then work on the one that bothers you the most. Ramsey was telling people to go with the lowest balance because they needed to start somewhere. But he wasn't writing it in stone. I think he would agree that if you resent one bill more than the other, to go with the one that you don't like.

Nancy

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305789 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 11:01 PM
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The interest rate is irrelevant at this point.

Actually it's not. If you pay off the one with the lower interest rate first, it will cost you more in total interest paid than if you pay off the one with the higher interest rate first. That's what I dislike about Dave Ramsey's method - people can end up paying a lot more, if the interest rates on their larger balances are several points higher than the rates on their smaller balances. If people consciously make the choice to pay off a smaller balance, after looking at the costs and deciding it's worth it, great - that's their decision. But to just pay off the smallest balance without even looking at what the cost differential is, which is what Ramsey encourages people to do - that's not encouraging people to make good financial decisions.

That said, with interest rates within 1% of each other, it won't cost you a lot - maybe a few extra dollars.

Personally, I'd run a spreadsheet and figure out how much it would cost me each way, and then decide if it was worth the extra cost to pay off the lower rate one faster.

AJ

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Author: determinedmom Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305790 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/22/2012 11:54 PM
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The $100 a month is always going to cost more than the $30 a month though. That's simple math. The interest rate is irrelevant at this point.

Not really. Although I do agree that with less than a percentage point between them that it may not be a big factor. It will still overall cost less money to pay off the highest rate first even if the $100 a month is the lower rate. If the $30 a month is the higher of the two interest rates then getting it paid off first will save you money since you will be paying that slightly higher rate off faster.

That said, if the rates are that close together then math alone doesn't necessarily make the decision and if you will be more motivated to pay off the larger balance first then go for it.

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Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305791 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/23/2012 7:38 AM
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The $100 a month is always going to cost more than the $30 a month though. That's simple math.

It's true that $100 is more than $30, but if the interest rates are close enough to treat as the same then you're not saving on interest by paying the one with $100 first (meaning that it won't "cost" you more to continue paying the small balance card). If you pay $X on either card you will reduce your interest payments by an equal amount.

However if the $100 card is bothering you then go for it...

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305795 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/23/2012 11:15 AM
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If it was your debt, what would you do?

I make decisions based on math. In this case, I would pay extra towards the card with the highest interest rate.

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Author: impolite Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305797 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/23/2012 11:26 AM
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Any cash flow issues at the moment? Or in the forceable future?

If yes - pay off the one with the smallest balance as quickly as possible, so that additional cash flow is available if needed.

If no - then I'd pay off the higher interest rate one first.

impolite

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305808 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/23/2012 6:24 PM
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FlippoHip,

You wrote, That isn't very crucial for this equation. Both are low rates and they are within a percent of each other. The $100 a month is always going to cost more than the $30 a month though. That's simple math. The interest rate is irrelevant at this point. I simply have a much, much higher balance on the big one. If the monthly interest payment was close, then interest rate would be a factor.

This might not be an answer you're looking for, but you should understand that what you're asserting isn't just simple math, it's simplistic math. The true cost of (borrowed) money is defined by the interest rate - not the payment amount. The amount of a payment affects cash flow (whether or not expenses exceed income). The ability to meet cash flow should not be confused with cost. The two are separate financial concepts.

Too many people don't understand that their is a huge difference between the two. If you want to get ahead of the game, the smart money will minimize costs without exceeding available income. But they have to go beyond that as well. How so?

Just because you can make a payment doesn't mean you can actually afford what something costs. In order to make that determination, you need to project your expenses out into the future and try to determine if you can meet your future goals and objectives while still making that purchase or borrowing that money today. To understand that, you have to come to an understanding of exactly what something cost you relative to the alternatives - not just whether or not you were able to make today's payments.

Anyway, that's why people here ask about interest rates. They do matter. They matter because they help inform the reader what your borrowed money is costing you - at least relative to what you borrowed. A monthly payment amount does not tell them anything about this cost. And without knowing your income and other expenses, they certainly can't make a judgment about cash flow...

- Joel

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 305817 of 308547
Subject: Re: Finish paying off one, or start on the other Date: 8/26/2012 10:49 AM
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<<I know Dave Ramsey says pay the smaller one off first, but that $100 a month is really getting on my nerves.

If it was your debt, what would you do?>>



The practical differences between the two are trivial.

Personally, I'd probably pay off the one with the small balance to save the nuisance of paying the bill each month.

But if the larger balance one is annoying to you, pay that off.

The key is to remain motivated to pay down and pay off the debt, in my opinion.


Seattle Pioneer

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