How to go about paying off debt

Anonymous · ‎12-27-2007

Ok, quick question. My wife and I will be getting a small chunk of money in a few weeks and we'd like to use that to fix our credit as it's kinda jacked up right now. Now, the question I have is which method of debt payment would be better for my credit (not worried about immediate affect, just worried about overall affect). Should we get everything caught up and pay everything down slowly over the next 12-24 months with this cash or should we just go ahead and pay it all of right now and get it out of the way?

I was thinking at first that just paying it all off right away would be better, but after doing some of the simulations on MyFico, I'm kinda confused now, hehe. The other thing I was thinking is that I could pay it off slowly and put half of the money we get into a 6-month or 12-month investment account to get a little more out of the cash to pay off a bit more debt. The amount we're getting won't pay off ALL of the debt, but it'll pay off a good chunk. OVERALL debt including car loans and such (no mortgage) totals about $40,000. about 18k of that is car loans, 7k is college loans, 5k is personal loans (all 3 of these are in good standing), and the bad debt totals about 10k. We're getting about 8k. Let me know what ya'll think. Thanks.

MidnightVoice · ‎12-27-2007

The FICO simulator often says paying it off over 24 months gives better scores, but this is because (I think) the calculation then adds 24 months of age to all your accounts and assumes nothing else happens (no lates, inqs or new accounts and no new balances).

personal opinion - pay off everything that is charging interest, highest interest first.

Others will chime in I am sure

The slide from grace is really more like gliding
And I've found the trick is not to stop the sliding
But to find a graceful way of staying slid

Anonymous · ‎12-27-2007

MidnightVoice wrote:
The FICO simulator often says paying it off over 24 months gives better scores, but this is because (I think) the calculation then adds 24 months of age to all your accounts and assumes nothing else happens (no lates, inqs or new accounts and no new balances).

personal opinion - pay off everything that is charging interest, highest interest first.

Others will chime in I am sure

Agreed. With the FICO simulator, if you pay it right away it only takes the score change into account for the short term. It doesn't simulate paying it off immediately and having good payments for 2 more years.

As to the original question, I would put the $8K towards the highest interest debt right away.

Anonymous · ‎12-27-2007

Awesome, thanks to everyone for clarifying that for me. Much appreciated.

theduke · ‎12-27-2007

I've faced the question regarding 'Do I invest or do I payoff debt first?' in the past and the answer is very logical. If your interest rate of the debt is higher than the return rate of the investment, you will lose money if you invest. Basically, pay off the debt first. Practical example: If I invest 2 grand in a 6 month CD that yields 8% I've made $160 BEFORE I pay any taxes, so it will realistically be less... Now if I pay off my 2 grand balance on my credit card that is charging me 8% interest (realistically speaking my interest rate is nearly double that, as is yours too I'll bet)... it just makes logical sense to pay off the balances charges the highest interest first.

Anonymous · ‎12-27-2007

After years of trying to convince myself that paying stuff off slowly will be better for me, and years of digging myself deeper and then kicking myself for not paying off when I had the money has led me to my approach of PAYING IT OFF WHEN YOU HAVE THE MONEY!!!!!!!!!.

Life is a funny funny thing, it tends to throw curve balls at you when you least expect it and that money that was "supposed" to be used for continuing to pay down debt seems to always be spent on other things besides debt.

Besides paying it off slowly and allowing the interest to accumulate will only result in a higher balance as opposed to paying it off earlier.

Anonymous · ‎12-27-2007

theduke wrote:
Practical example: If I invest 2 grand in a 6 month CD that yields 8% ...

WHERE ARE YOU FINDING CDs THAT HAVE AN 8% YIELD?!

Investing in off-shore accounts are we?

Well, where ever the CD is at, I WANT IN ... let me know! PM me. Man with an 8% return, I could finally get a mortgage and not feel screwed by the fact that over thirty years I will have paid more than double my houses value in interest. With the 8% return, I could get all that money back and then some. Shoot. Give me five years and I could flat out buy the house.

llecs · ‎12-27-2007

Try to, if you can, balance transfer the higher interest CC debt into a lower interest bearing card; e.g. rolling 5k in debt from a 20% interest card to a 10% card.

theduke · ‎12-27-2007

@Anonymous wrote:

@theduke wrote:
Practical example: If I invest 2 grand in a 6 month CD that yields 8% ...
WHERE ARE YOU FINDING CDs THAT HAVE AN 8% YIELD?!

Investing in off-shore accounts are we?
Well, where ever the CD is at, I WANT IN ... let me know! PM me. Man with an 8% return, I could finally get a mortgage and not feel screwed by the fact that over thirty years I will have paid more than double my houses value in interest. With the 8% return, I could get all that money back and then some. Shoot. Give me five years and I could flat out buy the house.

Funny guy.

It was an exaggerated example to try and mesh with the likely credit card interest rate...I don't know of anyone who has a 4.5% interest rate...

And hell man, replace the word 'CD' with a decent performing stock of your choice then and 8 percent gains is likely very realistic.

And i dunno man, an 8 percent return rate really isn't going to make you rich (or even comfortable) unless you're already rich (or comfortable).

Anonymous · ‎12-27-2007

Unfortunately, none of my CC's have that much available credit on them. The bad debt consists of 1 loan (currently in CO status), 4 store cards, and 5 actual credit cards. All of which are either very close to their credit limit or have been closed. So, that isn't quite an option for me. I think we are just going to do the lump sum payments, though...hopefully things on my credit report get much better

I like you sig, bro...your 8/1/07 scores are a bit higher than my current

But, I'll be working on mine hardcore over the next few months. Thanks, everyone