Best order in which to pay off credit card debt

Kismet

Hey guys, I manage all of my father's financial transactions (he runs a business and I manage the financial aspect of that as well, it's really pretty simple for what he needs.)

Anyway, he currently has 3 credit cards, all with about the same interest rates (high) that he's been paying on for a few years now - basically times were hard and he fell back on them, now he's working on paying them off since the new job is doing alright.

The range of debt isn't really that bad, from $1,200 to $2,000 on each card.


My question is, am I better off paying something like 2 times the minimum balance on every card or paying the minimum (or just over it) on two cards and then dropping the rest on one card?

Say the minimum for all cards is $75, and I can either choose to pay $150 on 3, or $75 on two and $300 on one.

Should I spread the large payment out over all cards, or focus on one at a time, or will it even matter? The interest rates are all very similar. I'm trying to pay them off and waste the least amount of cash on interest, as well as keep his credit history strong.

Heir

I've always heard that you should pay off the highest interest card first.

If you have the same interest on all of them, then it probably comes down to two thoughts:

1) Pay off the higher balance one first, as the amount of money charges from interest is the most.

Or

2) Pay off the smallest one first so that you see some kind of progress...as some folks get a bit burned out if they don't feel like they're making any kind of progress.

Either way, I'd budget a certain amount a month that you want to pay towards interest. I'd pay a little over the minimum on all but one, then use the rest of the budgeted money on one card, until you pay it off. Then go to another one.

LewieP's Mummy

We regularly change credit card for a new one with an interest free period, and when that ends, change credit card company again. We pay a small balance transfer fee (3% of what we transfer) but then for 6 months, everything we pay reduces the balance, as there's no interest to pay on what we owe.

Could you transfer all 3 balances onto one card, that way you only have one payment. If you've only got $5,000 debt in total, it will probably be cheaper to only have 1 card, and if you shop around, you can get some really good deals - some offer 9 months interest free period (capital 1 do at the moment). By doing this, we've had a free loan for 2 years, and have virtually completely paid off our debts.

mastman

consolidating them all onto one with some type of interest free period would be great, but don't keep doing that. You don't want to sit around and open up 24 different lines of credit.

mathematically, if they all have the same interest, it doesn't matter which one you pay off first. It'll reduce the amount of interest equally across the board.

proof:

$100 @5%;
$200 @5%
$400 @5%

say you have $100 extra to pay off

the highest one, your interest is still 100*.05 + 200*.05 + 300*.05, or 600*.05

say you pay off the lowest one, it is 200*.05 + 400*.05 or 600*.05

Thanatos

mastman wrote: »

consolidating them all onto one with some type of interest free period would be great, but don't keep doing that. You don't want to sit around and open up 24 different lines of credit.

mathematically, if they all have the same interest, it doesn't matter which one you pay off first. It'll reduce the amount of interest equally across the board.

proof:

$100 @5%
$200 @5%
$400 @5%

say you have $100 extra to pay off

the highest one, your interest is still 100*.05 + 200*.05 + 300*.05, or 600*.05

say you pay off the lowest one, it is 200*.05 + 400*.05 or 600*.05

Mastman has it right. Mathematically speaking, if they're all at the same interest, it doesn't matter which one you pay off first, provided you keep making the minimum payment on the other two in order to avoid getting any more fees added onto the balance.

AngelHedgie

LewiePs Mummy wrote: »

We regularly change credit card for a new one with an interest free period, and when that ends, change credit card company again. We pay a small balance transfer fee (3% of what we transfer) but then for 6 months, everything we pay reduces the balance, as there's no interest to pay on what we owe.

Could you transfer all 3 balances onto one card, that way you only have one payment. If you've only got $5,000 debt in total, it will probably be cheaper to only have 1 card, and if you shop around, you can get some really good deals - some offer 9 months interest free period (capital 1 do at the moment). By doing this, we've had a free loan for 2 years, and have virtually completely paid off our debts.

And in the process done some horrendous damage to your credit rating (you take a hit for opening new lines of credit and closing old ones, plus having too many lines open is another ding on your record.)

I've been doing a debt management course, and one lesson we're learning is the "debt snowball" technique:

1. Line up all your debts, from least to greatest.
2. Work on getting the first (smallest) debt completely paid off. All extra money put towards debt management is placed against this.
3. As you pay off each debt, the monthly payment of the paid off debt, plus any additional monies you were paying towards it, are now added to the payment for the next one. In this way, you gain momentum.

The main focus of this is behavioral adjustment, which is important. Because this technique gets you some quick wins, you get positive reinforcement (you can write off debts), which in turn encourages you to continue.

VThornheart

AngelHedgie wrote: »

LewiePs Mummy wrote: »

We regularly change credit card for a new one with an interest free period, and when that ends, change credit card company again. We pay a small balance transfer fee (3% of what we transfer) but then for 6 months, everything we pay reduces the balance, as there's no interest to pay on what we owe.

Could you transfer all 3 balances onto one card, that way you only have one payment. If you've only got $5,000 debt in total, it will probably be cheaper to only have 1 card, and if you shop around, you can get some really good deals - some offer 9 months interest free period (capital 1 do at the moment). By doing this, we've had a free loan for 2 years, and have virtually completely paid off our debts.

And in the process done some horrendous damage to your credit rating (you take a hit for opening new lines of credit and closing old ones, plus having too many lines open is another ding on your record.)

I've been doing a debt management course, and one lesson we're learning is the "debt snowball" technique:

1. Line up all your debts, from least to greatest.
2. Work on getting the first (smallest) debt completely paid off. All extra money put towards debt management is placed against this.
3. As you pay off each debt, the monthly payment of the paid off debt, plus any additional monies you were paying towards it, are now added to the payment for the next one. In this way, you gain momentum.

The main focus of this is behavioral adjustment, which is important. Because this technique gets you some quick wins, you get positive reinforcement (you can write off debts), which in turn encourages you to continue.

I like that technique, it's a good idea.

I wonder how severe the hit is for opening a new line of credit. Is there a # of points assigned for that kind of activity, or is it not so strictly defined?

fuelish

This is just the way I do it:
I pay off the high interest card first, sending the max I can and still make minumum on the other cards. This has the dual benefit of reducing the interest load faster and making a dent you can see quickly.

If the rates are all about the same I pick the one with the smallest amount. and send everything I can their way. Paying debt is easier when you see real change each month. It makes it feel like less of an uphill challenge.

Newton

If your dad has been making his payments on time for the last year or more, at least one of those credit cards would probably be willing to drop his interest rate. Call them all up and just ask for a lower rate, then transfer the full balance of the other two cards onto whichever one gives you the lowest rate. If you have an established payment history, there is no reason they should be charging you more than 10%.

LewieP's Mummy

AngelHedgie wrote: »

And in the process done some horrendous damage to your credit rating (you take a hit for opening new lines of credit and closing old ones, plus having too many lines open is another ding on your record.).

Not really. We've been changing our credit card for at least 6 years, have a solid credit rating, and a silly max purchase limit. We only have 1 card at a time, and never miss a payment. However, I agree, having too many cards is not sensible.

Its how you manage your credit/debt that impacts your credit rating. Example, 5 years ago I went into my bank (Royal Bank of Scotland) and said "can I have £5,000 in a Banker's Draft, please" answer "Yes, of course.". Last May, I walked into the Halifax Bank (who we don't bank with but they had a good interest rate) and asked for £87,500 to buy a house, and got the answer "yes, how soon do you need it?" in about 5 minutes, and yesterday went to my bank to borrow £8,000 to clear my parents' debts, their response was "when would you like it?".

People damage their credit ratings by missing payments, going over their limits or otherwise defaulting. Using credit sensibly builds your credit rating.

Daenris

The advice I would give about it is to pay off the lowest balance card first (assuming they are the same interest... otherwise go for the highest interest card). This is for purely psychological reasons, as once you pay off the card that's one less payment you have to make and you feel like you're making progress more quickly. Of course if they're similar balances as well it really doesn't make a difference.