My husband and I recently came upon $1000. Yeah, it may not be much to you but right now it’s a LOT to us. We’d like to use it to pay down some debt.
We have multiple credit cards (including store credit cards, there are 9 of them) with balances ranging from $100-$2,000.
We flirted with a few different ideas:
1. Pay off 3 of them COMPLETELY and have $200 extra to throw at the account with the next highest interest. The 3 we would be paying off do not necessarily have the lowest interest, however it would give us $100 extra dollars each month in saved payments to throw at other accounts that charge interest.
2. Throw all $1,000 at the account charging us the most interest. Unfortunately, it would NOT pay the account off completely, we would still owe about $300-$400 on the account. This would not save us any money on a month to month basis, however the monthly payment on this account is $75.
3. Throw the $1,000 spread out over all of our accounts to lower the amount we’re borrowing to lower our debt to income ratio and improve our credit. This would not save us any money on a month to month basis, however would improve out credit for now.
We are thinking the best option would be to completely pay off the accounts with lower balances, so that we would have a little bit of extra money each month to throw at the other accounts.
We just want to use the $1,000 in the smartest way possible. Please advise. Thanks. 🙂
This is a great attitude towards your debt. My first questions is do you have a mini emergency fund? If not, I would take that $1000 and put it away for emergencies. This amount will not cover everything, but it will cover a lot. If you blow a tire on your car and need to replace it, How will you pay for it? Credit card right? Now you have a little breathing room if something like that happens. You can pay cash for it instead of going further into debt, which is what you are trying to get out of.
Let me back up. My wife and I were recently in your shoes. We still are in debt, but not anywhere where we were. We are huge fans of the Dave Ramsey program called the Total Money Makeover. We got on this plan in November and had a Cash only Christmas. We have since paid off all of our cars ($800/month) almost a year early. We would like to pass this information on to you as it seems like it would help you.
We are on the plan. The first step is to save $1000 quick for the reasons I stated above. The second step is called the “Debt Snowball”.
List all of your debts on a piece of paper largest to smallest. Also list the monthly minimum and the payoff next to each. Now pay the minimums on everything except the smallest one. Throw every dime you can find under the car seat and in the sofa cushions at the smallest one. Once the smallest is gone. Take the money you would have spent paying off the smallest and roll it up to the next debt on the list. You put the minimum payment for that one, add it to the amount you would have paid on the smallest one that is no longer on the list, and every extra dime you have at the next one on the list. You can see by doing this, the amount you pay on each one as you go up the list gets bigger and bigger.
Yes I know that mathematically, you should throw all the money at the highest interest rate debt. It is really not that simple. I could do some differential calculus to prove otherwise but I will not bore you with the math. Personally, I think it is better to feel like you are making progress. It sounds like you have some bills that can be knocked off the bottom of your debt snowball rather quickly once you get started. If after a few months of this you see 3 or 4 bills gone off of your list, It is better than seeing 9 still there with smaller balances. You feel like you have traction and are making progress, not just standing still. I would highly recommend picking up Dave Ramsey’s book The Total Money Makeover. He can also be seen on TV on the Fox Business Channel. He can be heard on the radio in the US as well. You have to go to www.daveramsey.com to find stations and times. If you get fired up about the program, you need to have your husband read the book as well. You are a team.You have to be on the same page. If only one of you saves and the other spends feely, it will not work.
We have had to make some changes in our spending habits. It is not easy sometimes. We just think about what is more important. Going out to eat or paying off debt. We only buy stuff we need and that is in our budget. We do not buy frivilous stuff we don’t need anymore. There are many suggestions in his book that may help. We are also going to have a garage sale in May and have been selling useless stuff on e-bay to help pay off debt faster. Our biggest thing was going out to eat. We would go out about 4 nights a week. The average dinner would be about $30 for my wife and I. Do the math. That is $120 / week, $480/month or $6240/year. That’s a ton of cash we are now paying on or other debts.
Sorry for the length of this, I just get carried away sometimes. Anyway, get on the debt snowball. Pay the one off with the smallest balance first and then work your way up the list. It is a great feeling to see these things fall off the list in quickly. It takes some spending discipline and work, but it really works. I know this is long, but I hope helpful to you and your husband.
Always pay off the highest interest account(s) first. Regardless of who you pay, you will always have the same amount of money to throw at the accounts. Although it might mentally feel like you are making headway paying off a few small, lower interest accounts, you are actually hurting yourself in the long run because the interest on the higher interest cards will be more and thus, less of your payments will go toward principal.
Overall, the correct thing to do is put the $1,000 toward the high interest account. Then, decide the total amount you can pay monthly. Make minimum payments on the lower interest cards and throw the rest of the total at the highest interest card. Then, work your way down.
The best thing to do to insure your credit rating is great would be to pay all of the small balances off. Then, put the money you would have spent monthly on those bills into a savings account with interest. This will be you paying you which is always good! Pay the other bill off ASAP and your credit will be awesome. Good luck!
I strongly believe everyone should have at least 3 months salary saved in a savings in case of an emergency.
If you have this, then pay off the card with the highest interest rate.
Note: Paying cards in full each month is the way to get 800+ scores.
Its gonna take some math but I would say put it into the account where it would save you the most money on interest charges…so without really thinking about it I would say probably put it into that high interest rate card. Good luck and good for you for paying off ur debt
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