Funny, the “pay of the highest interest rate first” plan was in Ric Edelman’s book “The Truth About Money” which first came out around 1998, and has had two updates since. It’s a great, well-written book that introduces the reader to virtually every aspect of personal finance. It would be nice if you could add it to your “52 Books in 52 Weeks” series. The data (charts, graphs, & percentages) is a little dated - the last revision was in 2003 - but the information is timeless.

Interesting that you crunched the numbers in that fashion, but one of the concerns I had with Suze’s plan is in step 4. This is the ASSUMPTION that the number in step 1 is greater than the number in step 3.

What about when numbers 1 and 3 are equal or (yikes) if 3 is greater than 1? What about when there are more than 2 debts to be paid off? Using Suze’s method you may not have an excess to pay towards one debt.

Both plans are suboptimal. The debtor should pay off the debt with the highest interest rate first. Then snowball down to the next highest interest rate and so forth.

Actually, I’m not keen on either plan. I think they leave out some crucial first steps that everyone should do before starting on one of these plans.

1. Call your lowest APR cards and ask them to increase your credit line. Very often they will if you just ask. This should improve your credit rating since rating agencies look at credit used as a percentage of amount of credit. Raising your limit lowers that percentage.

2. Call each of your credit card companies and ask them to lower your APR. These companies will compete to continue doing business with you. Tell them the lowest APR you currently get and see if they can do better. See if there are any promotional rates they can offer if they can’t lower your APR permanently.

3. Transfer balances from your high APR cards to your lowest APR card. Max out your lowest APR card without going over. Continue transferring your highest to lowest.

4. Pay the minimums on all your cards. Add any extra amount to your highest APR card.

5. Repeat 4 monthly. Repeat 1-3 every 6 months.

It doesn’t matter what plan you sign up for if you keep the bad spending habits none of them will help.

Its fine and dandy that you work towards paying down your debt, but if you are still charging high amounts to those cards it gets you no where.

And calling the credit card companies to ask for reduction or increase doesnt always work. You might have a bad enough history that they will not budge.

I completely agree with Chris’s plan of action. a simply phone call is usually enough for you to start saving yourself some money. Amex right now is dishing out credit line increases like candy. just request $24,900 as your credit line since over $25,000 requires tax returns for the last 2 years. (AMEX cli is a no pull transaction regardless if its approved or denied)

It all depends on how you define best.

I think that any plan is “best” if you will actually stick to it. Calculating the least amount money spent to clear the debt is only useful if you go on to clear the debt.

I think Ramsey’s plan is better. Let’s say you have $300 extra beyond your minimums to pay towards your cards each month, and five cards with balances of $300, $1000, $2000, $3000, and $4000. Let’s further assume that the minimum payment on the last 4 are (just pulling numbers out of my ass here) $50, $100, $150, $200. Since we have $300 in month 1, I am ignoring the minimum payment on card 1.

The first month we pay off the first card. and pay the minimums on the other cards

The Second month we begin paying the 2nd card with our snowball. It takes roughly 3 months to pay down.

At the end of month 4, we now have our snowball plus $100 (the minimum payment from card #2, now paid off) to apply to the remaining cards.

Now, where this plan is different than Suze’s plan is that in the real world, things come up, and those things usually cost money. After month #4, with Dave’s plan, we now have our snowball plus $100. We can either roll that $100 up in the snowball OR if something comes up that month that costs $100, we can use it to pay THAT bill, thus avoiding having to take out extra debt.

Assuming our balances don’t match their order lowest to highest with their rates lowest to highest, Dave’s plan actually generates a greater cashflow month to month. This might not be important if you have the discipline to not spend more credit while rolling up your snowball, but if something comes up during the early part of Suze’s plan, since your cashflow is more tied up in minimum payments, you may end up having to derail your snowball for a month or two, or even worse, take on more debt. If you do take on more debt, its more than likely going to be on the higher interst cards because those are the ones that will have the most available credit on them.

Chris, you nailed it. Thanks.

Plus Dave says - “hey! if you could do math, you wouldn’t have been in this mess to start with!” You gotta love the guy’s attitude!

Chris - we used your method several years ago and it worked very well.

Chris [@ 6:04 pm February 22nd, 2007] has the best advice as far as I’m concerned. I’m a huge D.R. fan and I think his advice is the simplest and most effective to follow. It just may not be the cheapest. My first thought was to do Chris’ step #3, move as much of the CC debt you have to lower interest accounts. Rather than debating whether or not to pay off higher interest cards first, move the debt around strategically. But the first two steps mentioned by Chris would be ultimately helpful if self-consolidation is not as simple as my first thought would necessitate.

As the article says, Ramsey’s plan is what is better psychologically. It gets you a victory over a debt quicker. Remember that his target audience included many, many people that are in financial trouble - they aren’t going to get better rates from the CC companies, they aren’t smart with money (or they wouldn’t be in trouble) and they need to get the lift that a payoff provides. And Dave admits this on his show.

Another note: If you are prone to be forgetful and occasionally get smacked with a late payment fee, you have lowered your risk considerably with Dave Ramsey’s plan, since you have fewer accounts to keep track of.

One thing about moving all this debt around is that you may incure a 3% fee with each transfer some cap the fee more and more do not.

Increasing credit line to increase scores is GOOD IF YOU DONT USE THE INCREASED LIMIT ( Except for transfers if it makes sense) Some cards may offer a Balance transfer a t a low intrest rate like 3.9% for the life of the debt BUT remember it pays off first so if you do that deal on the 21% creditcard then you will pay off the 3.9% balance first and pay nothing on the 21% until the transfer is paid off in full. SO it becomes very complex in the math so ramsey may be best because of its simplicity and the its stressing eliminating debt, draconian ( almost ) budgeting to QUICKLY remove debts and its militant attitude towards any debt. It probably would be most successful in letting people become debt free which is its stated purpose.

Suze is partnered with FICO so her method of paying more than minium WILL Increase your FICO better but guess what if your FICO increases you might be tempted to GET MORE DEBT and make the creditors more money and increase your likelihood of defaulting and making them more even more money because you have increased the total of your debt. So buyer beware
1) balance transfers are not usually free
2) balance transfers at 0 or even low intrest rates pay off first so calculate that the other balance on that card will just keep accrueing intrest ie no “prinicpal” paid down on the other portion.
3) psychological vicotry is nice but so is changing HOW you think and USE debt to take the advantage away from the creditors.
4) Suze is basically an employee of FICO or at least cobranded an makes lots of cash from people trying to fix their debt while partnering with a company tied so closely to granting debt is a basic conflict of interest. SO if increasing your FICO is your goal then go for her method, it can save you money if you can manage your debt responsibly

True to form, I’m ten months late and $310 short…

I’ve done the math also and I also find situations where either method can work better. Now maybe I’ve way over-complicated this, but things like promotional interest rates, paying transfer fees to move balances, etc. can really hinder a calculation of the truly optimal result.

And what is optimal? It’s how we define it. Do we just want to be out of debt as soon as possible, regardless of interest cost? Dave’s method, hands down. Is “optimal” keeping total interest paid at a minimum? Most likely Suze’s, though I have created scenarios where a combination of Dave’s and Suze’s is necessary to accomplish it (truth be told, I have not actually been able to completely model the absolute lowest total interest payment over a series of debts, months, and changing snowballs, but I do know that scenarios exist whereby simply targeting the highest interest rate card each month does not result in the lowest total interest paid).

In short, I still struggle with finding that elusive condition that determines at any point in time which balance to prioritize over others, but what matters most is folks waking up to their financial situation, taking control of it and then keeping control by following systems that minimize their outflows and build wealth. They can either take a simpler approach to debt reduction or be super-geeks like us and squeeze out that last precious dime, but the point is that they ruthlessly pursue their debt elimination goals.

I have read these comments with great interest. Most everyone has some good ideas. The Ramsey plan is derived from his having lost hundreds of thousands of dollars and recovering from that staggering debt load. He knows DESPERATE! The primary key to getting out and staying out of debt is discipline. Positive reinforcement helps keep the discipline;thereby, the small victories are crucial to success.
But the Ramsey plan goes further, especially for those who are interested in spiritual growth, whether Christian or humanistic. Being in control of one’s finances allows a peace of mind and sense of security. I have led many FPU classes through my church. Several couples have enrolled to find out how to give more to church/charity.
So, crunch numbers, engage the psychology, play the game, ro do whatever it takes to put yourself in charge of your own money. Savings and investments are far more comforting that those monthly bills.
Debt-free for eighteen months, including the mortgages (we have a vacation home too), we truly live like we want to now.

What I find most intersting are the limited number of Suze Orman people who are able to declare themselves debt-free. I don’t hear a lot about them while Dave’s approach has it mathematical variances..in the end it works and it gives people the information and direction they need to achieve their goal. Coming from experinece it is nice to be debt free, which I have been for 6 years and while everyone speaks about the little nuances of each others approach I have not made a house, car or any other payment for 6 years and am banking all that money for my benefit. Thanks Dave!!

As Dave says, 80% of personal finance is phycological. We can sit around and crunch the numbers all day long. In the end, the actual cost savings are irrelevant and insignificant. So what if you save $250 one way vs another? If you were so worried about saving $250, you would never have gotten into debt in the first place. Debt does not work mathematically. Neither does debt reduction. Personal behavior is the key. Any plan will work if you change your behavior, stop spending more than you make, aggresively pay off debt and never borrow again. I think Dave’s plan is the best at addressing human nature, and is therefore the better plan.