cancel
Showing results for 
Search instead for 
Did you mean: 

Help: What's the best PayOff Strategy?

tag
Walt_K
Senior Contributor

Re: Help: What's the best PayOff Strategy?

Paying higher APRs first isn't actually the snow-ball method.  The snow-ball method says that you pay off the lowest balances first, ignoring APR.  The theory is that even though you will be paying more in interest, it is easier to stick with this method because you tackle the small balances first, have more of a sense of progress, etc. 

 

Concentrating on the higher APRs first is obviously the way to pay the least amount of interest.  But if you need some extra motivation, the snowball method, where you concentrate on the lowest balances, may work better.  The biggest thing is to pick something that works for you so that you can keep paying your debts down while keeping spend under control.  Since this wasn't your debt, discipline might not be an issue, and paying the higher APR debts first probably makes more sense. 

 

All of the other advice about calling for APR reduction and looking for other lower interest rate options through CU/bank or intro CC BT offers is good too.  But as mentioned, you may have to put that off a little until you get your utilization down. 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


Take the FICO Fitness Challenge
Message 11 of 37
castlefox
Regular Contributor

Re: Help: What's the best PayOff Strategy?

No prob Akr_Chels happy to help

MyFICO score- Equifax - 12.03.11 - 780 Experian 12.03.11 - 763
(FAKO Scores) EXP PLUS Score Dec 2011. 748
Advanced Risk Score 2.0 (NextGen) 793 Dec 2010
Vantage Score (2011) MAR = 771 Jun = 771 Sept= 788 Dec= 773
2012 MAR = 782 JUN=783 Dec = 789
2013 Mar-796 Jun-799 Dec- 797
Message 12 of 37
Anonymous
Not applicable

Re: Help: What's the best PayOff Strategy?

Thank You Walt, for breaking that down. I’ll be able to do the snow-ball method while paying off the highest APR cards. Since the Cards with the Highest APR’s are my cards with the lowest balances. I expect to be able to pay off the two lower balances and higher APR cards within 60 days.

Message 13 of 37
Anonymous
Not applicable

Re: Help: What's the best PayOff Strategy?


@Anonymous wrote:

Hello Board,

 

I have made a mistake. I've always been the person to pay my credit balance in full. However, I made the decision to share my account with others by opening up additional cards for others in my life. I currently have $7,620.23 in debt.

 

Capital One: $885.00 with an APR of 17.90%

Amex: 1,848.98 with an APR of 17.24%

Chase: $4,886.25 with an APR of 13.24%

 

What’s the best PayOff Strategy?


 

How much can you pay per month?  Excluding a really good BT offer, it's best to pay down whichever is costing you more in interest first.  Even though your interest rate is lowest on Chase, you'll pay them more in interest because the balance is significantly larger than on Cap1 or AMEX. 

Message 14 of 37
drkaje
Senior Contributor

Re: Help: What's the best PayOff Strategy?

Did OP at least end AU privileges?


Starting Score: 675
Current Score: EX 753 FICO, EQ 737FICO, TU 738
Goal Score: 776 FICO


Take the FICO Fitness Challenge
Message 15 of 37
Anonymous
Not applicable

Re: Help: What's the best PayOff Strategy?

When paying a fixed amount, the highest APR balance will always decrease the fees you're paying the most.

Message 16 of 37
Walt_K
Senior Contributor

Re: Help: What's the best PayOff Strategy?


@Anonymous wrote:

@Anonymous wrote:

Hello Board,

 

I have made a mistake. I've always been the person to pay my credit balance in full. However, I made the decision to share my account with others by opening up additional cards for others in my life. I currently have $7,620.23 in debt.

 

Capital One: $885.00 with an APR of 17.90%

Amex: 1,848.98 with an APR of 17.24%

Chase: $4,886.25 with an APR of 13.24%

 

What’s the best PayOff Strategy?


 

How much can you pay per month?  Excluding a really good BT offer, it's best to pay down whichever is costing you more in interest firstEven though your interest rate is lowest on Chase, you'll pay them more in interest because the balance is significantly larger than on Cap1 or AMEX


Not sure what you are saying here, but it sounds like you might be saying OP should pay Chase first because Chase is costing more in interest.  I apologize if I'm misconstruing that.  But just to clarify in case anyone else reads it that way, that is not the correct way to view it.  It is true that the absolute value that Chase is charging in interest will be higher than the absolute value that Amex or Cap One charges this month, but it's still only 13.24% of the balance for Chase versus 17.24% or 17.9% of the balance of the other cards.  So you are always better off paying the higher APRs if you are trying to pay the least amount of interest.  As a percentage of the balance, Cap One and Amex are costing more in interest each month.  That's the proper comparison. 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


Take the FICO Fitness Challenge
Message 17 of 37
Anonymous
Not applicable

Re: Help: What's the best PayOff Strategy?


@Walt_K wrote:

@Anonymous wrote:

@Anonymous wrote:

Hello Board,

 

I have made a mistake. I've always been the person to pay my credit balance in full. However, I made the decision to share my account with others by opening up additional cards for others in my life. I currently have $7,620.23 in debt.

 

Capital One: $885.00 with an APR of 17.90%

Amex: 1,848.98 with an APR of 17.24%

Chase: $4,886.25 with an APR of 13.24%

 

What’s the best PayOff Strategy?


 

How much can you pay per month?  Excluding a really good BT offer, it's best to pay down whichever is costing you more in interest firstEven though your interest rate is lowest on Chase, you'll pay them more in interest because the balance is significantly larger than on Cap1 or AMEX


Not sure what you are saying here, but it sounds like you might be saying OP should pay Chase first because Chase is costing more in interest.  I apologize if I'm misconstruing that.  But just to clarify in case anyone else reads it that way, that is not the correct way to view it.  It is true that the absolute value that Chase is charging in interest will be higher than the absolute value that Amex or Cap One charges this month, but it's still only 13.24% of the balance for Chase versus 17.24% or 17.9% of the balance of the other cards.  So you are always better off paying the higher APRs if you are trying to pay the least amount of interest.  As a percentage of the balance, Cap One and Amex are costing more in interest each month.  That's the proper comparison. 


 

No, you're right, that's what I was trying to say.  I guess I'm not understanding interest correctly?

 

If you owe $50 and are charged 20% interest, you're going to pay $10.

If you owe $1 and are charged 100% interest, you're going to pay $1.

 

So why would you pay the $1 before the $50?   

Message 18 of 37
Walt_K
Senior Contributor

Re: Help: What's the best PayOff Strategy?


@Anonymous wrote:

 

No, you're right, that's what I was trying to say.  I guess I'm not understanding interest correctly?

 

If you owe $50 and are charged 20% interest, you're going to pay $10.

If you owe $1 and are charged 100% interest, you're going to pay $1.

 

So why would you pay the $1 before the $50?   


Look at it like this.  Taking your examples above, and assuming you're charged 20% and 100% monthly instead of annualy, and also to make it simple, assume no minimum payments.  Let's assume that the person has $12 to pay toward their debts per month.  If you pay toward the $50 first it will look like this:

 

Month1

Balance1 $50 + interest = $60.  Balance2 $1 + interest = $2.  $12 paid toward Balance1.   

Month2

Balance1 $48 + interest = $57.60.  Balance2 $2 + interest = $3  $12 paid toward Balance1.

 

Month3

Balance1 $45.60 + interest = $54.72.  Balance2 $3 + interest = $4  $12 paid toward Balance1.

 

This is far enough to take it to illustrate.  After 3 months, the person has paid $36 and still owes $46.72.  Now assume they pay off the $1 first.

 

Month1

Balance1 $50 + interest = $60.  Balance2 $1 + interest = $2.  $2 paid toward Balance2, paid in full. $10 paid toward Balance1.   

 

Month2

Balance1 $50 + interest = $60.  $12 paid toward Balance1.

 

Month3

Balance1 $48 + interest = $57.60. $12 paid toward Balance1.

 

After 3 months in this scenario, the person has paid $36 and owes $45.60.

 

You're always going to pay less interest by paying the highest APR first.  You have to think of it on a dollar per dollar basis.  The dollar you put toward the $50 saves you less money than the dollar you put toward the $1 balance.  It doesn't matter that the interest of the $50 has a higher absolute value ($10) versus the absolute value of the interest on the $1 ($1). 

 

Hope that helps.  Not sure how else to explain it.  Maybe if you thought of it as a negative investment.  If you had two funds that were hemorraghing money, which one would you want to withdraw from first? 

 

 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


Take the FICO Fitness Challenge
Message 19 of 37
Anonymous
Not applicable

Re: Help: What's the best PayOff Strategy?

 

 


@Anonymous wrote:

@Walt_K wrote:

@Anonymous wrote:

@Anonymous wrote:

Hello Board,

 

I have made a mistake. I've always been the person to pay my credit balance in full. However, I made the decision to share my account with others by opening up additional cards for others in my life. I currently have $7,620.23 in debt.

 

Capital One: $885.00 with an APR of 17.90%

Amex: 1,848.98 with an APR of 17.24%

Chase: $4,886.25 with an APR of 13.24%

 

What’s the best PayOff Strategy?


 

How much can you pay per month?  Excluding a really good BT offer, it's best to pay down whichever is costing you more in interest firstEven though your interest rate is lowest on Chase, you'll pay them more in interest because the balance is significantly larger than on Cap1 or AMEX


Not sure what you are saying here, but it sounds like you might be saying OP should pay Chase first because Chase is costing more in interest.  I apologize if I'm misconstruing that.  But just to clarify in case anyone else reads it that way, that is not the correct way to view it.  It is true that the absolute value that Chase is charging in interest will be higher than the absolute value that Amex or Cap One charges this month, but it's still only 13.24% of the balance for Chase versus 17.24% or 17.9% of the balance of the other cards.  So you are always better off paying the higher APRs if you are trying to pay the least amount of interest.  As a percentage of the balance, Cap One and Amex are costing more in interest each month.  That's the proper comparison. 


 

No, you're right, that's what I was trying to say.  I guess I'm not understanding interest correctly?

 

If you owe $50 and are charged 20% interest, you're going to pay $10.

If you owe $1 and are charged 100% interest, you're going to pay $1.

 

So why would you pay the $1 before the $50?   



If you had 1 dollar to pay to either balance, you would pay it to the 100% interest account first.

 

Here's what happens if you pay the $1 on the 50 dollar balance:

 

$49@20%=9.8 dollars

1$@100%=1 dollars

total 10.8 dollars paid in interest.

 

Here's what happens if you pay the $1 on the 1 dollar balance:

 

$50@20%=10 dollars

0$@100%=0 dollars

total 10 dollars paid in interest

 

 

 

If you had 10 dollars to pay, the best thing to do would be to pay 1 dollar on the 100% interest account and 9 dollars on the 20% account.

Message 20 of 37
Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom FICO receives compensation.