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correct way to pay down my debt?

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mr.reid
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correct way to pay down my debt?  Reply with quote  

Hello out there,

I have a question about my credit card debt. I have 7 credit cards and am trying to figure out the best, most cost-effective way of paying down my debt? If I have 5-6k to pay these cards down with, what is the correct method? The balances and rates are as follows:

Card 1 - balance $1895, rate 14.9%
Card 2 - balance $1085, rate 16.9%
Card 3 - balance $1237, rate 26.9%
Card 4 - balance $2591, rate 17.9%
Card 5 - balance $2917, rate 26.9%
Card 6 - balance $1700, rate 19.9%
Card 7 - balance $1675, rate 22.9%

Now, I know I should pay down the cards with the highest balances and highest rates first; i.e. Cards 4,5 and maybe 7.? But, to what amount do I pay them down, before the interest on other balances becomes greater?

Ultimately, I need to pay as little as possible in monthly interest charges (I think?)

Also, Transferring to other cards with lower rates is NOT an option currently

PLEASE HELP!!...any assistance is greatly appreciated! I'll even paypal you a few dollars for your time. thanks!


Last edited by mr.reid on Thu Jun 14, 2012 9:25 pm; edited 2 times in total
Post Thu Jun 14, 2012 8:30 pm
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littleroc02us
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Personally since all of your debts are very close in amounts, I would pay minimums on all of them and knock out the highest interest rate. Normally I would suggest paying off the lowest debt first. As far as saving a little bit here based on interest payments, personally I wouldn't care about that so much as just getting to the business of paying off the debt as fast as you can. I mean unless you plan on dragging this process out for 5-10 years it doesn't matter.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu Jun 14, 2012 9:18 pm
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oldguy
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I agree - I would pay off the ones with the toxic rates first - 3,5,7. That is $5829, roughly what you have available. Then work on the other $7000 in any order that you like. The interest on the $7000 will be just over $100/month, so throw everything that you can at them to get that bleeding stopped as soon as you can. Very Happy
Post Fri Jun 15, 2012 12:51 am
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fast
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Re: correct way to pay down my debt?  Reply with quote  

quote:
Originally posted by mr.reid

Card 1 - balance $1895, rate 14.9%
Card 2 - balance $1085, rate 16.9%
Card 3 - balance $1237, rate 26.9%
Card 4 - balance $2591, rate 17.9%
Card 5 - balance $2917, rate 26.9%
Card 6 - balance $1700, rate 19.9%
Card 7 - balance $1675, rate 22.9%


Method 1) The one taught in school:
Sort by interest rate in descending order. Pay off the highest interest rate first. Then, pay off the one with the next highest interest rate. This is best when your concern is your long term financial interest.

Method 2) Sort the order by ascending balance:
Pay off the one with the lowest balance first. Then, pay off the one with the next lowest balance. This is the one that has the greatest psychological benefit and will help keep you motivated to continue.

Method 3) The somewhere in the middle approach:
There are many different approaches, and each have their advantages and disadvantages, but the important thing is that we keep the objective of getting out of credit card debt in mind, so whether you use one of the approaches above or some combination or something entirely different, just keep the momentum of paying more than the minimums, even if you're doing nothing more than simply paying an extra $10 a month on each card.

Method 4) An approach I personally came up with:
Take your balance and divide it by your minimum payment. You'll come up with a number. Call it your B/P number. Sort those numbers in ascending order. Pay everything you can afford to pay on the one with the lowest number while paying just the minimums on everything else. This is similar to method 1 except that your intermediate term interests tend to take precedence over your long term interests. This method isn’t perfect, and there are a variety of unique situations where this wouldn’t turn out to be in one’s best interest (if one’s best interest is a function of only their long term interests). This method is pretty good (I think) at helping with cash flow issues.

When in doubt, go with method 1.
Post Fri Jun 15, 2012 4:54 am
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marsjohn
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hi nice question and try to get formula for this from any accountant or banking job holders he can tell you in right way...
Post Sat Jun 16, 2012 8:46 am
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mr.reid
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thank you  Reply with quote  

Thank you for the help guys! I appreciate the insight.

thanks marsjohn, I would love to know the formula. that's exactly what I am looking for.

also, thanks Fast for the optional ways of doing it...very helpful

and thank you oldguy and littleroc, you guys are right on. I appreciate you taking your time to give advice to a stranger. you're awesome. thanks again!
Post Sat Jun 16, 2012 2:54 pm
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keganjosh
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When it comes to reducing debt quickly, there are a variety of ways to approach the problem. What works for one personality might not for another. The most important factor is choosing which method fits your income and lifestyle. With the right approach, it's possible to pay off debt in a short period of time.
Post Tue Apr 09, 2013 8:16 am
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