How should we tackle this?

iVillage Member
Registered: 11-05-1998
How should we tackle this?
5
Thu, 11-04-2004 - 11:48am
I suppose I should introduce myself first. My name is Elizabeth, and I'm trying to tackle our family's debt. Our cc debt is at about $60,000! Plus we have a mortgage and a small car payment. Amazingly, we are not behind on any of our bills, and our credit score is at 704, which surprises the heck out of me.

Anyway, we are in the process of refinancing our mortgage, which will result in a payment that is $400 lower than what we're paying now. Also, after this month's orthodonist's bill, we're all done paying for DS's braces, so we'll have an extra $140 per month. So that's $540 a month that can now go toward paying off debt.

How do we do that, though? I do want to put $100 a month of that into savings (we don't really have anything in savings, except for my 401K), but should I divide the rest equally over the 5 credit cards ($85 extra on each one each month), or should I put big chunks ($400-440) on one card, then when that's paid off, move on the the next one? If we go with that strategy, should we work from biggest balance to smallest, or base it on highest interest rate first, then work on down? OR should we do the smallest balance first so we have the thrill of paying something off quickly to keep us motivated?

I'm open to any and all suggestions.

Thanks.

Elizabeth

iVillage Member
Registered: 02-19-2004
Thu, 11-04-2004 - 12:22pm
Some will say pay the highest interest rate first, some say pay from lowest balance to highest. I would not split the money equally over each debt, I'd pay the minimum on everything except the one you want to pay off first, usually called the target debt.

If you have several large balances, I'd target the highest interest rate one first. If you have some large balances and a few small balances too, I'd pay the small one's off first, and then when all you have is larger balances, I'd focus on the highest interest rate first. They key is really to make a lot of progress on one debt at a time. It's psychological, it makes you feel like your making progress and it keeps you focused. It also makes sense financially, because paying a little over the minimums on everything you will probably not get anywhere fast and end up paying more interest in the long run.

I have two credit cards, both with around $4,000 on them. One is zero interest rate for now, and then the interest rate pops up to 20%... so I'm targeting that card to get it paid before the interest rate pops up. The other card is around 11.5%, and once the first card is paid I can focus all my extra money on the second one.

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iVillage Member
Registered: 09-21-2004
Thu, 11-04-2004 - 1:37pm
Honestly how you do it depends on you. People say to pay off high interest first. But some other people say to pay off small balances first if that makes you feel as if you are actually progressing. That is what I do but at the moment I am paying off 2 of my high interest cc because once they are paid off, we will NEVER use them again. The rest we are keeping. They will be paid off in 4 months and then I will go back to paying off the small balances. But if you pay off the small balances first, you could have more $ to flake onto your high interest cards and that will also bring them down faster. I say do whatever makes you feel at ease.
iVillage Member
Registered: 05-30-2003
Thu, 11-04-2004 - 10:23pm
Hi, Elizabeth-

Do you have an emergency fund in place? If not, instead of jumping right in on debt, you may want to consider getting one set up, with whatever amount is good for you, like $1000 or so. Because when you start to pay off your cards, the most mysterious thing happens (at least it did to us, LOL)-all of a sudden, there's an emergency and you have to pay for it with the credit card. Which of course will make you want to beat your head against your desk, but that's a whole 'nother story...:D

Anyhow, we are doing the lowest balance to highest balance thing, and surfed what we could over to lower rates to buy time. We're down to 2 credit cards now, but started with something like 4-5. We pay minimums on everything BUT the card with the lowest balance, and throw whatever extra we can to it. When it gets paid off, the normal payment we paid to it got 'rolled over' to the next victim, er, bill in the snowball order. We then threw all we could at it, etc.


Mainly, to me, it's all about looking at the end of the month and seeing the debt total go down, and I like to do things in a semi-orderly fashion. I know if we'd started with the highest APR, I'd have given up because it would have taken too long! Either way, it all needs paid off, so in the end, it only mattered how I felt about it-not what the numbers told me!

Hope this helped some...

~Lisa (whose given name is Elizabeth--only used on 'official' things, and if her mom is yelling at her, LOL)

iVillage Member
Registered: 11-05-1998
Fri, 11-05-2004 - 7:36am
We don't have an emergency fund, which is why we're planning to put $100 a month of our windfall into savings. Of course, we may actually come out of the refi with about $1500 cash back to us (won't see the final paperwork til next week), and we could make that our emergency fund.

I wrote down all of our credit card balances last night from smallest to largest balances and figured out how long it would take to pay each one off with the additional money plus snowballing each previous card's payment onto the next one. We're looking at 5 years plus to being debt-free, but at least on paper, it looks doable.

Elizabeth

Avatar for cl_phocid
iVillage Member
Registered: 03-26-2003
Fri, 11-05-2004 - 7:56am

Elizabeth,


Congrats on writing everything down!

All my best,
Danni