Help: What's the best PayOff Strategy?

[Walt_K]

Wishing I had just made it that simple.  Nice explanation.

[bichonmom]

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@Walt_K wrote:

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@Anonymous wrote:

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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?   

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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? 

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Walt, you illustrated that *very* well! I was trying to figure out how to explain it to them, and you did a great job. To save the most money, it just makes sense to pay the highest interest rate off first, no matter what the balances are. (I happen to be an accountant, so it makes sense to me, anyway.)

[Anonymous]

You guys are absolutely right.  I don't know what I was thinking!

[Anonymous]

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@drkaje wrote:

Did OP at least end AU privileges?

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Good Question. I ended the AU privileges for the abuser only.

[Anonymous]

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@Anonymous wrote:

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@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?

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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. 

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This was my thinking too. To pay off the highest balance first. But, now I'm doing what everyone seems to be suggesting which is to pay off the highest APR card. So, far I have paid off the Cap 1 card. It has a $0 balance. I've only paid the Amex down to $1785. Before the month is out I'll pay 1k on it. Starting in December, I see myself only being able to pay something between $500 - 1k.

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

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@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?

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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. 

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This was my thinking too. To pay off the highest balance first. But, now I'm doing what everyone seems to be suggesting which is to pay off the highest APR card. So, far I have paid off the Cap 1 card. It has a $0 balance. I've only paid the Amex down to $1785. Before the month is out I'll pay 1k on it. Starting in December, I see myself only being able to pay something between $500 - 1k.

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You're moving very quickly on these cards  Keep it up and you'll be done in no time.

[Creditaddict]

Sorry if someone said this already but I read real fast and saw the $1600 available to pay this month, I would pay Cap1 off and pay the min. on Chase and remaining onto Amex and hope they don't start balance chasing you.  Next month I would pay the remaining balance on Amex and then work on Chase... maybe once Amex and Cap1 are paid off you could get approved for a citi with the 21 month 0% Balance Transfer offer and get most of Chase onto that.

[Anonymous]

CredItaddict,

Thank you for your suggestions (that I'm going to follow) and your post. But, just my luck I will be subjected to balance chasing. My Chase card will be renewed in the month of January since its schedule to expire on 1/12. I wonder if this increases my chances of experiencing balance chasing. I also hope Amex doesn't do it, after they receive a large payment.

[drkaje]

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@Anonymous wrote:

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@drkaje wrote:

Did OP at least end AU privileges?

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Good Question. I ended the AU privileges for the abuser only.

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Is the abuser doing anything to make things right? 

Have they given you any money? $7K is a lot of change!

[Anonymous]

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@drkaje wrote:

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@Anonymous wrote:

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@drkaje wrote:

Did OP at least end AU privileges?

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Good Question. I ended the AU privileges for the abuser only.

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Is the abuser doing anything to make things right? 

Have they given you any money? $7K is a lot of change!

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I literally haven't received a cent. Right now, I'm cutting back on my spending until I pay my cc debt down to around $1500.