Author Topic: Question About Paying Off Debts  (Read 1721 times)

GRSConstruction

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Question About Paying Off Debts
« on: June 16, 2014, 06:17:44 PM »
Hi everyone, I appreciate all the help I've gotten thus far on here and had another question I was hoping someone could answer for me. I have 3 credit cards and 1 line of credit I have been able to set myself up to pay off by the end of the year. This will leave me with only my car and house payments as far as any debt. I'm feeling good about getting these paid off and getting my wife and I moving towards our goals and better financial decisions, etc. In less than a month since I first found this site I have gone from feeling overwhelmed and not knowing how I'd get out of these debts to cutting our monthly expenses and focusing all extra cash on these debts and now being on track to have them paid off in full in just 6 months.

So here's my question...I can pay these off two different ways. First, I could continue making the normal payments I make each month on them (except the Visa, it will be paid off this weekend). This would be $100 Amex, $100 Best Buy, and $210 on the line of credit. Going this route I would have enough saved to pay off the Amex and Best Buy card by the end of August and the line of credit could be paid off in full by the end of December (from monthly savings and expected bonus).

The second option is to increase the amount I pay on each payment every month until they're paid off. This would pay them off in the same amount of time, but I would pay them off in payments rather than all at once. Is there any difference or is one way better than the other?? I may be over thinking this, just thought I'd make sure! Here's further info on the debts:

The three credit cards are:
1. Visa card - $6,500 balance with 18.99% interest (ran up from wedding and honeymoon 2 years ago)
- By the end of this week I'll have enough cash to pay this off in full.

2. American Express card - $1,100 balance with 16.99% interest (used for a hefty vet bill after our wedding when we were in a low spot with our savings)
- I can pay this off by end of August.

3. Best Buy card - $1,700 balance with 0% interest until August of 2015 (washer and dryer)
- I can pay this off by end of August

The line of credit has a balance of $7,600 with a 10.95% interest rate. As mentioned above I will have it paid off by the end of December.

Thanks in advance!

-Grant

dragoncar

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Re: Question About Paying Off Debts
« Reply #1 on: June 16, 2014, 06:32:37 PM »
After you pay off the Visa, I'd make minimum monthly payments on all cards.  Then put any additional cash each month into paying off the AMEX.  Then put any additional cash each month into paying off the LoC.  Make minimum payments on Best Buy until all others are paid off.  This is based on the interest rates -- every dollar you pay off reduces your interest charges immediately, so it's not worth saving up to pay off in one big lump sum.

The downside to paying off aggressively is that you don't have a wad of extra cash for emergencies.  I don't consider this a big problem since you can always charge emergencies to the AMEX (but don't plan on doing this -- real emergencies only)

vagon

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Re: Question About Paying Off Debts
« Reply #2 on: June 16, 2014, 06:46:18 PM »
After you pay off the Visa, I'd make minimum monthly payments on all cards.  Then put any additional cash each month into paying off the AMEX.  Then put any additional cash each month into paying off the LoC.  Make minimum payments on Best Buy until all others are paid off.  This is based on the interest rates -- every dollar you pay off reduces your interest charges immediately, so it's not worth saving up to pay off in one big lump sum.

+1.

Just think about it rationally, attack the highest cost first, which seems to be the higher interest debt. Make sure you've calculated any fees etc on the cards and factored this into cost though as it could unintuitively be a different form of debt that costs you more.

GRSConstruction

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Re: Question About Paying Off Debts
« Reply #3 on: June 16, 2014, 08:09:05 PM »
That makes sense. I won't be able to pay off the line of credit until the end of the year either way since I'll be using some of my year end bonus to pay a large chunk of it off. So the best route would be to pay off the Amex over the next 2 months, then just make the max payment we can afford each month on the line of credit and pay off the balance in December when I get my bonus. Then after it is paid off I can turn my focus on the Best Buy card. That is the plan I'll follow then! I also have $5k in emergency savings so don't plan on having to use a credit card.