Once you have those payment shifts/scenarios worked out, then you calculate the total amount of interest paid over the term of the debt. Whichever scenario costs the least is the one that will get you out the fastest, so that’s the one to go for. From my point of view.

Then go for the schedule that costs you the least money.

What matters in the end is how much money it costs you to pay off the loans.

Often interest expense isn’t a concern because the borrower doesn’t understand how much interest will cost at the time she or he is charging up loans on credit cards. Only after it’s too late and several thousand bucks have been racked up does the buyer realize that interest expense really IS a concern.

Psychologically this is an individual matter. If the goal is to get free of debt, the person needs to think through the situation and decide which will feel like the greater accomplishment to her or him: get rid of the debt that’s costing the most, get rid of the largest debt, or build toward debt freedom by starting with the smallest debt and working through to the end of the biggest one. Only you know how your mind works, and so only you can know which will be the most effective strategy for you.

Personally, paying interest frosts my cookies. The more interest, the deeper the frosting. I would want to get rid of the higher-interest debt first. But I certainly can appreciate the feeling of SUCCESS that would come from getting free more quickly of one or two smaller debts first. Diff’rent strokes…

Encouraging someone to remain in debt, so they can go into MORE debt (financing new real-estate as you say) is irresponsible. I’m not against making money, but you can do it without debt, and there’s no question that is the BEST way to do it.

Staying in debt adds risk to making money… a market turn can wreak havoc, and if you are in debt elsewhere as well, can wipe everything out. People up until about a year ago who were leveraging on real estate are in a rude awakening right now. It’s one thing to suffer a bad real estate market, but being in debt elsewhere on top of their real estate is a recipe for disaster.

If you are planning on writing a book as it appears, I would offer a piece of advice – focus on listening to those talking to you first. It’s hard to answer when you didn’t really hear the question.

Investigate if it’s possible to transfer amounts to lower-rate cards. For example, is it possible to transfer the $1,000 @ 13.5% to the 9% Chase, or the $5,700 @ 9% to a third lower-rate card? I’m clueless here.

Create a household budget to see how much money can be realistically set aside each month to pay down these 2 cards exclusively.

As noted earlier in this thread, the effective interest rate on the Citi card is presently 5.178%. The Chase card at 9% is the significantly more expensive one and should be paid off first because of the higher interest rate. However, it should be noted that as the $3,800 @ 3% principal is paid down, the effective rate on the Citi card will increase and there will come a point when it will equal or exceed the 9% rate of the Chase card. This tipping point occurs when $3,050 of the Citi principal has been paid, i.e., when $750 @ 3% principal still exists. The equation is [(3800-X)*3+(1000)*13.5]/(4800-X)=9; solve for X. Before the tipping point is reached, the Chase is the higher-interest card. After the tipping point is crossed, the Citi is the higher-interest card.

If $3,050 plus interest charges over several interest periods, or a substantially equal amount, can be paid on the Citi card before the 9% rate kicks in on the Chase card, I suggest paying the Citi card off completely before the Chase. The method takes advantage of the 0% interest rate on the Chase card (no payments required) to pursue the tipping point on the Citi card. Something on the order of ~$630/month for 5 months (April-August inclusive) will be needed.

If $3,050 plus interest charges or a substantially equal amount cannot be managed, I suggest paying the required minimum on the Citi card and paying the balance of the set-aside monthly amount towards the Chase. The rationale here is the Chase card is likely to remain the higher-interest card for some time to come and as much as possible of it should be paid off first. The 0% interest for the next 5 months means every dollar you send to Chase goes directly to paying down the principal which is a pretty good deal; make the best of it. Should it ever come to pass that the tipping point is passed on the Citi card before the Chase card is paid off, then invert the payment stategy — pay the required minimum on the Chase and pay the balance of the set-aside monthly amount to the Citi — as the Citi will then be and will remain the higher-interest card until it’s paid off.

My SWAG is several hundred to perhaps a thousand in interest charges before you’re done (depends on size of set-aside monthly amount). Good luck.

Remember: The object of PF is to end up with MORE money not pay down debt (that’s just a means to an end).

Personally, I think Dave Ramsey’s strategy is pure genius for probably 90% of people trying to tackle debt. I imagine 10% or less have the discipline to tackle it in purely mathematical form and stick with it, evidence to why Dave Ramsey has grown so popular.

I advocate NO debt, unlike the commenter I was replying to who advised to keep the 5.2% CER debt and invest all but the minimum since returns would be greater. I personally do not think anyone should be investing if they are carrying credit card debt, end of story. The only debt I feel is okay to carry while still investing would be low-interest fixed student loans, and your mortgage. Period.

Best Wishes,
D4L

I feel that its a personal decision which order you put them in. While one person my be more motivated by quick knock-offs someone else might be motivated by something else.

In one case, I was simply motivated by the fact that I’d had a bad encounter with a collector. So, I made sure to get rid of that one first.

Its all personal.

First we paid off the debts with the lowest balances first just to get them out of the way.

Second, when we had two or three of the larger debts remaining, we began focusing on the one with the highest interest rate.

By doing this we benefited from the initial excitement/motivation of paying off debts (Dave Ramsey) with the mathmatical benefit of paying of the higher interest rate loans.

@Brian “arguing that emotion trumps numbers for people in debt.”

Yep! If people “did the numbers” first, they wouldn’t borrow money in the first place. Paying interest, no matter how low the rate, doesn’t make *mathematical sense*. Get over your “but the results are worth it” garbage. If we’re talking *purely* numbers, borrowing money loses every single time.

@Phil: Yup. I’m a Financial Peace University Coordinator at my church and we’ve had over 100 people complete the class so far. Dave’s plan worked best for everyone who was struggling, as most people had major “wins” just in the 13 weeks of the class.

@Kim: Ayup! A HELOC puts an enormous amount of risk on your home. Not only does this not really work (you can’t borrow your way out of debt), but if you can’t pay the loan, they can take your house, whereas plain ol’ credit card collectors can’t touch your house – it’s not collateral on your credit cards. Sure, they’ll threaten to, but the worst they can really do is garnish your wages after suing you.

@Kacie: Yes, I agree, this reader asking the question should pay off the debt already. Less than $5000 is a couple part time jobs for a few months. Deliver pizzas, toss boxes for UPS or even bus tables at Denny’s. Something. $5000 is a pittance of credit card debt. The average household income in the USA last I looked it up was around $42,000/yr, and $5000 is a little more than 10% of that. Quit spending money on eating out, DVDs, going out to movies and clubbing, whatever.

The sad reality is that 99% of the people do not spend less than they earn, and that is why they are so much in debt on their credit cards.

This plan will really not work for most people because most people do spend more than they make.

I have a question for you guys. We have a student loan at 2.75% and a mortgage at 6.375%. Would you pay off the mortgage before you paid anything extra on the student loans?

Is this a math problem or an behavioral problem? I’ve seen 3 mathematical solutions.
1) The author (mostly math)
2) Dave Ramsey (mostly behavioral)
3) Post #3 (pure math)

Rather than state my personal opinion, I would ask rather than which is the mathematically best, if you explained the system to 1000 people carrying consumer debt and ask them to execute them, which system would produce the most debt free people after say 3 years?