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March 17, 2011

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Aren't rational people, Sense, deson't look appealing, phrases that tell alot about the people who are in trouble. Others phrases, it was on sale, I just got to have it, I'm depressed and who knows what else can be more excuses.

When you are dealing with these sort of "emotions" with a credit card, there is no real way to pay down this debt because the problem is not the debt but the person.

Transfer all high-interest credit card balances to a new card that offers a 0% balance transfer promotion (or similarly low rate like .99%). Make sure there's a cap on the amount the bank will charge you to make the transfer, like 2% of the amount of the transfer or $99, whichever is greater (or ask if they will limit the transfer charge since there is more than one transfer. They might).

Now remember exactly when the promotional rate ends, pay it off like gangbusters, and then transfer what remains at the end of the promotion to another card offering a low-interest promotion. Repeat again and again until the balance is paid off because you don't want to pay high interest if you don't have to.

Or get a very low rate HELOC (like 3 or 4%), transfer the cc balances to that, and the interest is tax-deductible.

And then build up a $5000 emergency fund, put it in cd's so that you can't have easy access to the $. At the same time, sign up for a decent health care plan, get good life ins., disability ins., auto, umbrella, and homeowner's insurance and never go back to carrying a cc balance for any reason.

If I read the post correctly, "doesn't look appealing" is FMF's own opinion of one debt-payoff method, not the attitude of a debtor toward paying off debt. It's true that most people aren't entirely rational about money. I've lost money through being too debt averse; that's better than getting in over my head, but it's no more rational.

I would be curious, FMF, as to what you've seen as the main causes of excessive debt in your counseling career -- catastrophic illness, natural disaster, death, divorce, addiction, sheer unbridled irresponsibility? I see a strong tendency here to think of debtors as bad or stupid people (see comment above); is that true in your experience?

@Lucia,

I think that a general lack of financial education is a big reason that many get into the cc debt quagmire. That and having limited resources to fund the lifestyle you have chosen or have fallen into, i.e. suddenly out of a job, low-paying job w/student loan debt, an unplanned pregnancy, a necessary relocation, living in a city w/a high c.o.l., buying more car and/or house than necessary w/o realizing the costs involved.

Just can't wait to be there when my kids are ready to make those important financial decisions so that I can do for them what my parents didn't do for me: enlighten them (but hopefully not in a nagging way)!

Lucia --

Of the people I've counseled, there are two primary reasons for them being in debt:

1. Rampant over-spending (this is by far the #1 reason)
2. Job loss

I am working on paying off a mountain of debt. I even took my tax refund this year and paid off debt. I'm guessing my credit score is going up because all of the sudden I am now getting credit card offers in the mail again, where I wasn't getting any at all. Of course, they all go in the shred bin!

I haven't charged anything this year that I haven't been able to pay off at the end of the month and it is certainly peace of mind.

I have used the method of paying off the highest interest rate first because I am paying more in interest on the higher rate cards than the cards that have a larger balance.

The answer to the question posed in the title of this posting is.... aggressively.

I still look at it mathematically - pay off the high-interest debt first.

Taking the emotionally satisfying route (lowest balance first) is just compounding the problem. There needs to be a change in the way of thinking about money - becoming more systematic rather than emotional - to get out of that trap for the long run.

Depends on how much money between the high interest rate and the low balance. If it is $2000 with high interest rate and $500 with low interest rate, then go ahead to pay off that $500. Otherwise, pay off high interest rate should be the first priority.

Lack of financial education is right--but how much education do you need to have to understand that the highest interest rate is hurting you the most? I find it discouraging that anyone would even think this is a question, frankly.

Agree with CJ 100%....

If people in credit card debt can't get the math over their emotions, then they have bigger problems understanding the final cost of purchases (and things "on sale") when not paying their balance in full each month.

I too am a fan of the pure math answer--pay off the highest rate first.

But the bigger pure math issue is that if you don't have the discipline to suck it up and change the spending habits that got you into trouble in the first place, the amount you'll have to apply to any of the suggested methods is, uh, zero.

Now that we're in the middle of tax season, it's a good time to suggest that those with credit card debt who are getting refunds should not only use some or all of the refund to reducing debt, but also to adjust withholding accordingly and direct the additional resulting net pay to debt reduction.

Preaching about letting the government hold your money at 0% for much of the year is not the big deal it used to be with savings rates now nearly 0%--but it's a huge deal if you're trying to reduce credit card debt that's grinding you out at double digit rates.

I do a combination of transferring the high interest to a low or no interest for the longest term possible and make payments toward it to have them paid off by the end of that term, if possible. I find it is generally lower than the payment I was making. I then then use the difference and go after the lowest balance. When that one is paid, I roll that payment on to the next lowest, increasing the amount for each consecutive debt. The outgoing cash flow remains the same, but you are making strides to eliminate the debts.

I think you have to understand how a person got into debt in the first place, and how capable they are of quickly changing their attitudes vs acting emotionally, before you can answer the question. You also have to have a clear picture of all of the balances and rates in play.

Paying off the highest interest rate is mathematically best. Seeing progress by taking down low balances is emotionally satisfying. For some people, the right approach might be a hybrid -- look for something with both a lowish balance and a highish rate, start with that, and revisit the question once that's done. Their reaction will let you see if they're ready to transition to a "take down the highest rate" strategy or if they need to focus on another low balance.

Back when I was deep in debt, I didn't do any of those. I paid off the debt with the highest monthly minimum payment first. That way it gave me more cash flow once the debt was paid off to put towards the next debt to pay it off quicker. I was well aware of the higher interest rate payoff method, but it worked better for me by allowing me more cash flow as well as giving me a sense of accomplishment.

CJ

One of the greatest comments I have seen in a long time.

We were in cc debt only and the balances were around $34k. I lost my job, took ayear to find another one and helped my kids some. This helped make it that high. However, I had learned one lesson early-never be late with a payment.

Even though I had as many as 10-12 cc's at first, I was getting all the fantastic offers. Later, when a money magazine said you were ahead if your cc's were at 14%, all mine was in 3 cc's with 9.9% interest UNTIL PAID OFF. Later I got an offer for 4% UNTIL PAID OFF. Made a slight goof on that one and ended up paying around 6.5%, which wasn't shabby at the time. The last 3 years I used the 0% for 1 year. I now pay 2 cc's off monthly. One is for automatic deductions for donations and bills. The other one I put every purchase I can on it.

I also had a role model, so to speak. When I managed the S&L, a lady came to me for a home loan. We couldn't make it at that time because her husband's job was too new, after being out of work for a year or so. We got to talking and she told me about the idea of whittling down the number of cc's. Therefore, I knew it could be done and we really did it. My husband and I did not want to take bankruptcy because we felt it would be stealing. We had spent the money, we needed to repay it. (Oh, within a year this woman and her husband had a loan and built a new home. Happy ending.)

I can see those people deep in cc debt who would be better off paying off the smallest one first. After all, most of you have learned to look dispassionately at money matters. Those in deep debt are scared, depressed, and know it is their fault they are in this position. They need something to help kick that mind set in the butt. So the quick payoff of one cc is a big boost and helps them go forward better.

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