Comments on: Pay Off Smaller Debt or Larger Interest Rate? http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html Credit cards are waging a war, you just don't know it yet. Mon, 01 Oct 2007 18:55:44 +0000 http://wordpress.org/?v=2.9 hourly 1 By: missiondebtfreedom http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html/comment-page-1#comment-26 missiondebtfreedom Fri, 09 Feb 2007 03:49:20 +0000 http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html#comment-26 I'm a Dave Ramsey fan, but have also tweaked the program to my own liking. Like you, interest rates concern me because the higher the rate, the more it melts away my "debt snowball." Better to knock out those high rate cards first and then move than $$$ on to the smaller, pesky debts. Good advice! I’m a Dave Ramsey fan, but have also tweaked the program to my own liking. Like you, interest rates concern me because the higher the rate, the more it melts away my “debt snowball.” Better to knock out those high rate cards first and then move than $$$ on to the smaller, pesky debts. Good advice!

]]> By: EMF http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html/comment-page-1#comment-24 EMF Tue, 06 Feb 2007 01:46:43 +0000 http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html#comment-24 In your example, you did not distinguish the interest rates between the two debts, so I'm assuming that they're the same. In which case it makes sense to pay off the smaller first. At a payment rate of $100/month, you're not going to knock the larger debt down much and it will still charge a lot of interest over the next year. And if the interest rate on the smaller debt were higher it would definitely be the one to pay. Interest charges are interest charges no matter which debt they're applied to. In this example I would apply the $100 towards whichever charged the higher interest rate. Another thing to consider is the transaction cost of making a payment. If you pay your bill on line there's still the hassle factor and if you have to snail mail it there's the cost of the stamp. Plus if you're tracking your finances each debt adds even more to the hassle factor. If instead of the $1000 debt there were 10 debts of $100 each it would be worthwhile to pay off the smaller debts before attacking the $10,000 debt even if their interest rates were slightly lower due to the hassle factor, and the cost of a stamp on a $100 debt raises the effective interest rate by 4.68%. By addressing the smaller debts first, the number of bills to pay decreases by one each month in this example. In your example, you did not distinguish the interest rates between the two debts, so I’m assuming that they’re the same.

In which case it makes sense to pay off the smaller first. At a payment rate of $100/month, you’re not going to knock the larger debt down much and it will still charge a lot of interest over the next year. And if the interest rate on the smaller debt were higher it would definitely be the one to pay. Interest charges are interest charges no matter which debt they’re applied to. In this example I would apply the $100 towards whichever charged the higher interest rate.

Another thing to consider is the transaction cost of making a payment. If you pay your bill on line there’s still the hassle factor and if you have to snail mail it there’s the cost of the stamp. Plus if you’re tracking your finances each debt adds even more to the hassle factor.

If instead of the $1000 debt there were 10 debts of $100 each it would be worthwhile to pay off the smaller debts before attacking the $10,000 debt even if their interest rates were slightly lower due to the hassle factor, and the cost of a stamp on a $100 debt raises the effective interest rate by 4.68%. By addressing the smaller debts first, the number of bills to pay decreases by one each month in this example.

]]> By: » Linky Linky! on Blueprint for Financial Prosperity http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html/comment-page-1#comment-22 » Linky Linky! on Blueprint for Financial Prosperity Mon, 05 Feb 2007 02:37:52 +0000 http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html#comment-22 [...] at War on Credit Cards, I write about the fallacy of paying your lower balances instead of your higher interest loans. Thinking about putting in a low flow showerhead? Check out Dawn’s experience with a low flow [...] [...] at War on Credit Cards, I write about the fallacy of paying your lower balances instead of your higher interest loans. Thinking about putting in a low flow showerhead? Check out Dawn’s experience with a low flow [...]

]]> By: » Linky Linky! on Blueprint for Financial Prosperity http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html/comment-page-1#comment-21 » Linky Linky! on Blueprint for Financial Prosperity Mon, 05 Feb 2007 02:37:52 +0000 http://www.waroncreditcards.com/pay-off-smaller-debt-or-larger-interest-rate.html#comment-21 [...] at War on Credit Cards, I write about the fallacy of paying your lower balances instead of your higher interest loans. Thinking about putting in a low flow showerhead? Check out Dawn’s experience with a low flow [...] [...] at War on Credit Cards, I write about the fallacy of paying your lower balances instead of your higher interest loans. Thinking about putting in a low flow showerhead? Check out Dawn’s experience with a low flow [...]

]]>