After several attempts, I got super serious in January 2004. At the time, I was making about 35K a year and I was over 50K in debt. I started selling everything that wasn't a necessity to get a jump start. I also worked a second job. I had been making the minimum payments, but could never get ahead. I sent in my last payment in May of 2006. There is no part of it that's easy, but it can be done! Coming here holds me accountable and very aware of my spending.
Hi there! I'm no expert but I've done a lot of research on one issue. I don't know how to be succinct so bear with me.
From my standpoint the decision "which cc to pay on first" has a lot to do with your individual personality and habits and whether you are primarily trying to rid the debt or if you are also trying to rehab your credit score number etc. There's probably more views on it but those are the ones I weigh. The way it was explained to me is ...
Lets say you've got $50.00 'extra' to send to a cc principal (you already have all your minimum payment money). IF the goal is to cut debt ASAP, ideally the money should go toward the higher interest card because while 50.00 is 50.00, that money applied to a principal that is at 29% helps you more than applied to one at 10%. This will whittle away at the overall debt total faster and more financially efficiently (more bang for your 50 bucks). Once you get the highest interest card paid off, you take all that money and apply it to the next highest and so on. This doesn't necessarily help your credit score - it is designed to make the most of your payments and cut the total debt ASAP.
On the other hand, if you are trying to do both cut debt and improve your score then you may want to keep in mind that having a high balance compared to the total limit on each card is bad for your score. I've seen it explained that you want to aim for cards to have balances no more than 30% of the available limit. However, even that varies from person to person, when I talked to a guy working at Chase Visa about which looked better, paying off one whole card or paying down both, he said to shoot for balances no more than 50% of the limits. (BE careful here though... the cc companies are becoming notorious for lowering your total credit amounts even if you're on time etc. I know of a couple people who've used tax returns etc to 'pay down' multiple cards only to get notices that the limits have been lowered so much that they're at higher than 50% again. - So much for helping the credit score by lowering percentages. My one friend took it with a grain of salt but the other was fairly devastated and it took her a while to get re motivated. She still remarks that she'd rather have paid off a small card or two if she'd known that the percentage efforts were going to get screwed up. Of the 3 motivators, hers are in this order: fix credit score, then fewer cards to deal with, then the interest rates. Since what she did didn't ultimately help her credit score her next thought was about the little cards she could have paid off not, "Oh man think have far that money could have gone towards that 24% card.)
Also it's a matter of personal habits and mindset: If you have a bunch of different cards and trouble keeping track of due dates, payments etc and the hassle is getting to you or you end up making late payments (which have high fees) - you may want to just start paying off the ones with the lowest balances. Then pretty soon you'll have less to keep track of. It's also a huge motivational lift for many people - "YEA that card's at a zero balance, X more cards to go!"
Personally, I find that the amount of finance charges I pay on the high interest cards makes me sick to my stomach. I haven't used a card since January so my payments are strictly to pay off the debt and no purchases. I look at my cc statements and see the required minimum payments as two fold: money applied to the debt and money to cover the monthly interest 'finance charges' - which in my view are to punish me and make money off me and keep me in debt.(can ya tell how much I love cc companies) Therefore, I pay toward the highest interest rate card first and I keep a running total of my "total debt" as my motivation. Even though I don't get to see the zero balance on the lower cards, I still get to see my total go down and I get to know that it's going down as fast and efficiently as I can control.
I think it really is about how your brain and emotions work - not so much a definite 'right' or 'wrong' approach. If I was more motivated by paying off cards, I could be down to three cards totaling about 18K right now instead of six cards at the same total. If I were motivated by needing to get my score up, I'd be aiming toward paying them all 6 down to about 30% of each card's limit. BUT since I'm motivated by needing to feel like I'm getting the most out of each dollar of my payments, and I'm incredibly stressed about the monthly 'finance charges' on top of my principal, I attack the highest interest card first and I watch my total debt go down rather than each card's total. The only exception to that was a card that had a monthly service fee and a fee for any payment method other than snail mail. I factored those fees in and even though it wasn't my highest interest, I paid it off first because those fees made it essentially function at a higher monthly service percentage (interest 7.9%, $7 monthly fee, $11 fee for making payments, $45 yearly fee) than my highest interest percentage. Plus, they were rude and ticked me off so there was additional motivation not to have to deal with them and not to allow them to make any more money off me.
It's what works for me when I factor in all the info I could research with my thoughts, feelings, motivators etc. Hopefully, you'll be able to wade through all the pros and cons as you see it and find the approach that gives you the most peace of mind as you work your way out of debt.
Hope this made sense and had at least one useful sentence. :)
Lissa
PS: I clicked EDIT to add that I'm not minimizing the effect a credit score has on lives. My score was in the mid to high 700's for most of my twenties and early thirties. Now it's below 600 (all of them are below 600) and no bank (or financial institution at all - including insurance companies) would even waste the water to put me out if I was on fire! I get that the credit score number is a huge factor for people - it bugs me too. I'll never be able to move until my debt is paid way down AND my score comes back up. I just happen to be MORE bugged on a day to day basis by the money being wrung out of me and wasted in interest charges. To each her own.
When I started my debt repayment, I personally focused on the lowest balances. It gave me a feeling of great motivation to keep going when I stopped getting the bill in the mail, never mind seeing a balance on a credit card go way down, and quickly. I had one card, probably about 18% interest and a balance of over 20K. That card ended up being the last one I focused on. But, by the time I got to it, I was able to make 3 or 4 times the minimum payment per month. So, I paid it off much faster than I would have been able to if that was the card I started to pay off first. Make sense? I agree with the PP that it has a lot to do with you & your own emotions. So many times it will feel easier to give up and way more fun to go on a shopping spree. So, you've got to stay motivated and on course. Only you know what approach will get you there.
I'm in the middle of reading The Total Money Makeover, and the author just answered my question about whether or not to take the remains of our savings out and use it to pay down a CC...a definite NO.
I had been working for 4 years on a $35,000 debt. That was reduced to $4,200 by May and I had put away savings of $30,000. Since then I've borrowed $10,000 more for home improvements and repairs, and spent my savings down except for my $10,000 emergency fund. I'm back in the debt reduction saddle and with some work, I know I can reduce it to zero this time!
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~Jackie, BookCrossing Member
~Jackie, BookCrossing Member & Warming Families Volunteer
<~Jackie, BookCrossing Member
~Jackie, BookCrossing Member & Warming Families Volunteer
<~Jackie, BookCrossing Member & Warming Families Volunteer
<There is no part of it that's easy, but it can be done! Coming here holds me accountable and very aware of my spending.
My biggest problem right now is that there are so many decisions to make...
Start with the credit card with the lowest balance or the highest interest rate?
Put some into savings or apply it all to debts?
~Jackie, BookCrossing Member & Warming Families Volunteer
<Hi there! I'm no expert but I've done a lot of research on one issue. I don't know how to be succinct so bear with me.
From my standpoint the decision "which cc to pay on first" has a lot to do with your individual personality and habits and whether you are primarily trying to rid the debt or if you are also trying to rehab your credit score number etc. There's probably more views on it but those are the ones I weigh. The way it was explained to me is ...
Lets say you've got $50.00 'extra' to send to a cc principal (you already have all your minimum payment money). IF the goal is to cut debt ASAP, ideally the money should go toward the higher interest card because while 50.00 is 50.00, that money applied to a principal that is at 29% helps you more than applied to one at 10%. This will whittle away at the overall debt total faster and more financially efficiently (more bang for your 50 bucks). Once you get the highest interest card paid off, you take all that money and apply it to the next highest and so on. This doesn't necessarily help your credit score - it is designed to make the most of your payments and cut the total debt ASAP.
On the other hand, if you are trying to do both cut debt and improve your score then you may want to keep in mind that having a high balance compared to the total limit on each card is bad for your score. I've seen it explained that you want to aim for cards to have balances no more than 30% of the available limit. However, even that varies from person to person, when I talked to a guy working at Chase Visa about which looked better, paying off one whole card or paying down both, he said to shoot for balances no more than 50% of the limits. (BE careful here though... the cc companies are becoming notorious for lowering your total credit amounts even if you're on time etc. I know of a couple people who've used tax returns etc to 'pay down' multiple cards only to get notices that the limits have been lowered so much that they're at higher than 50% again. - So much for helping the credit score by lowering percentages. My one friend took it with a grain of salt but the other was fairly devastated and it took her a while to get re motivated. She still remarks that she'd rather have paid off a small card or two if she'd known that the percentage efforts were going to get screwed up. Of the 3 motivators, hers are in this order: fix credit score, then fewer cards to deal with, then the interest rates. Since what she did didn't ultimately help her credit score her next thought was about the little cards she could have paid off not, "Oh man think have far that money could have gone towards that 24% card.)
Also it's a matter of personal habits and mindset: If you have a bunch of different cards and trouble keeping track of due dates, payments etc and the hassle is getting to you or you end up making late payments (which have high fees) - you may want to just start paying off the ones with the lowest balances. Then pretty soon you'll have less to keep track of. It's also a huge motivational lift for many people - "YEA that card's at a zero balance, X more cards to go!"
Personally, I find that the amount of finance charges I pay on the high interest cards makes me sick to my stomach. I haven't used a card since January so my payments are strictly to pay off the debt and no purchases. I look at my cc statements and see the required minimum payments as two fold: money applied to the debt and money to cover the monthly interest 'finance charges' - which in my view are to punish me and make money off me and keep me in debt.(can ya tell how much I love cc companies) Therefore, I pay toward the highest interest rate card first and I keep a running total of my "total debt" as my motivation. Even though I don't get to see the zero balance on the lower cards, I still get to see my total go down and I get to know that it's going down as fast and efficiently as I can control.
I think it really is about how your brain and emotions work - not so much a definite 'right' or 'wrong' approach. If I was more motivated by paying off cards, I could be down to three cards totaling about 18K right now instead of six cards at the same total. If I were motivated by needing to get my score up, I'd be aiming toward paying them all 6 down to about 30% of each card's limit. BUT since I'm motivated by needing to feel like I'm getting the most out of each dollar of my payments, and I'm incredibly stressed about the monthly 'finance charges' on top of my principal, I attack the highest interest card first and I watch my total debt go down rather than each card's total. The only exception to that was a card that had a monthly service fee and a fee for any payment method other than snail mail. I factored those fees in and even though it wasn't my highest interest, I paid it off first because those fees made it essentially function at a higher monthly service percentage (interest 7.9%, $7 monthly fee, $11 fee for making payments, $45 yearly fee) than my highest interest percentage. Plus, they were rude and ticked me off so there was additional motivation not to have to deal with them and not to allow them to make any more money off me.
It's what works for me when I factor in all the info I could research with my thoughts, feelings, motivators etc. Hopefully, you'll be able to wade through all the pros and cons as you see it and find the approach that gives you the most peace of mind as you work your way out of debt.
Hope this made sense and had at least one useful sentence. :)
Lissa
PS: I clicked EDIT to add that I'm not minimizing the effect a credit score has on lives. My score was in the mid to high 700's for most of my twenties and early thirties. Now it's below 600 (all of them are below 600) and no bank (or financial institution at all - including insurance companies) would even waste the water to put me out if I was on fire! I get that the credit score number is a huge factor for people - it bugs me too. I'll never be able to move until my debt is paid way down AND my score comes back up. I just happen to be MORE bugged on a day to day basis by the money being wrung out of me and wasted in interest charges. To each her own.
Edited 7/14/2009 11:42 pm ET by lissa3g
But I hate making decisions - and procrastinate terribly when important ones are needed
All three CCs have due dates at the beginning of the month, so I guess I've got a couple of weeks to decide...
~Jackie, BookCrossing Member
~Jackie, BookCrossing Member & Warming Families Volunteer
<~Jackie, BookCrossing Member & Warming Families Volunteer
<Pages