We’re Interest Order - How About You?
There’s a never-ending debate in the personal finance world about what order to pay off your debt when you have numerous debts at varying balances and interest rates. In an ideal world, your head, your heart, and your gut would agree, and the order in which you attack your debts would be obvious. But this is often not an ideal world, and sometimes your head says one thing, your heart says another, and your gut might even pipe up with a third opinion. On Day 32 of 33 Ways and 33 days to Reduce Debt and Increase Savings, NCN at No Credit Needed says to decide which debt to attack first, and outlines the three common choices. You can attack highest interest to lowest (mathematically most desirable, a clear head candidate), lowest balance to highest (often the heart’s choice), or simply start with the debt that bothers you the most (your gut speaks). So what do you choose?
For us and our situation, the decision was pretty straightforward. Our debt with the highest interest was also the debt that bothered us the most. And all four of our debts started off with pretty high balances, so starting with the lowest balance debt would still take several months to pay off and wouldn’t provide any immediate psychological or emotional satisfaction. So we chose to attack our credit card debt, which was our highest interest debt, with the greatest vengeance, and focused the extra in our debt snowball as well as all of our snowflaking efforts upon it. We’ve been temporarily sidetracked by an unfortunate engine replacement in our car which necessitated a complete emergency fund overhaul, but as soon as we’ve restored that and eliminated the remainder of the $3600 car repair (down to $800), the last of that credit card debt (which started at over $6000 but is now $155.17 and counting) will be history. I’m also a math geek so attacking the highest interest rate is emotionally satisfying for me.
However, I am not a die-hard math-is-everything believer. As long as what you choose is working for you and getting you out of debt, and another method that might make more straight mathematical sense just won’t work for you - do what you need to do. Getting out of debt is the key. That’s why we’re doing this and that’s what we’re fighting for. We don’t all travel the same road and we don’t all get there at the same time. The journey is sometimes as important as the destination.
So if you’re working through the process of eliminating debt - what method did you choose? Leave a comment sharing your successes and struggles and become part of the journey.
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January 25th, 2008 at 7:57 am
We’ve chosen to use what I call, “tax advantage” ordering. Even though it has the lowest interest of all, we’re paying off the car loan first since interest on that is not deductible and therefore is lost money. I recommend the same with credit cards. After that, I will tackle the loan with the best reward for paying down. That means I will be paying down on my home equity loan since I can take control of my tax and insurance escrow when my total debt-to-value ratio is 80%. It’ll take me long enough to get there that I haven’t decided what to do afterwards and will revisit when I get closer.
January 25th, 2008 at 8:00 am
Interest order all the way! Another math geek here - its a huge psychological motivator to pay down the card that charges me the most interest!
It worked out that my highest interest card was also my highest balance card. I can see how people go for the instant satisfaction of paying of a low balance. I’m six months into my debt reduction snowball and I’m still working on that first card. The good news is, once I’m done with that one the rest will follow easily giving me great incentive to keep it even when my highest interest debts are long gone:)
January 25th, 2008 at 8:37 am
This is a constant debate for us. Right now we are doing fastest pay off to longest pay off. It’s pretty much in smallest balance to biggest balance order. None of our interest rates are crazy so there isn’t a lot of vengence for one bill or the other. Although the Sallie Mae loan is really bothering me, with all that I’ve been hearing about them lately, and that will be the next to go. It’s been looming over my head for far to long with a small balance.
January 25th, 2008 at 8:46 am
I’ve come to the conclusion that it’s always psychology first. As a physicist, I’m big on math so I focus on interest rates, but in the real world, the people with the biggest problems with debt aren’t just those with the most debt, it’s those with no plan to get out of debt (or to at least manage it wisely). I’ve come to suspect that those without plans generally aren’t all that interested in the math of the debt and are often (usually?) more motivated by closing accounts than by saving money in the long run.
Of course, when presented with the numbers, I’ve seen a number of people change their minds. Once you develop the discipline of paying off debt, the numbers start to become more important and I think some people shift to interest rates first rather than balance.
That’s just my opinion though, based on VERY limited observation — if you don’t fit into my generalizations, PLEASE don’t feel like I’m insulting you personally!
January 25th, 2008 at 9:11 am
We’re a smallest debt to largest debt family. At this point, though, we only have a 0% credit card (it better be 0% anyway…grrrrr) and our student loan, which is at something like 6%. It makes sense to pay off the credit card first, before they bump the interest rate on us.
January 25th, 2008 at 9:30 am
This is the first month I have had credit card debt for a very long time because I took a trip recently and I will pay it off by the end of February. The only other debt I have is a long standing education loan I took out to send a grandchild to a specialized school for 1 1/2 years. Due to living on a fixed income, I can only pay the monthly payment, but having read this site, I am beginning to add snowflakes every month of small amounts from my online surveys, mystery shopping and accumulated change in my purse.
Thanks paidtwice for your inspiration!
January 25th, 2008 at 9:35 am
I put all of my credit cards in order from lowest to highest balances, then started tackling the smallest balance first, paying that off, gaining confidence in my ability to pay down my debt, and then snowballing that payment into the next - so on so forth. Ideally and according to my all powerful spreadsheet, I can have 4 accounts paid off in 12 months.
January 25th, 2008 at 9:59 am
I paid the lowest amount first…I didn’t even look at interest rates when I was paying down my debt (not very informed)…However, now that the debt is gone, I realize I should have paid the stressful bills first…then go on interest. Any bill that brings stress to your life, regardless of interest rate, should be eliminated. You’ll feel better and more motivated to pay off less annoying debt.
January 25th, 2008 at 11:30 am
Interest order here too. Our one interest payment was so much higher than the others…therefore it became the most annoying debt too. I like the idea of starting with the most annoying–whether that’s based on size, interest, or whatnot. The only downside is that you’re left with comparatively comfortable debts. But if you’ve gotten the one taken care of, then that’s a start and hopefully you can ride the high.
January 25th, 2008 at 11:40 am
I went balance order myself. It was a huge boost…not just psychologically but also in terms of freeing up money to smack the living daylights out of our larger debts. Now I am down to the last one, and the extra payment is three times what the normal payment is
and that FEELS GREAT!
January 25th, 2008 at 11:44 am
Lowest debt to highest debt is what worked for me!
January 25th, 2008 at 12:42 pm
Interest order. My budget spreadsheet is set up to show me how much interest is being paid, so I get a psychological boost from seeing that number (as well as the overall total) go down. While I’d like to see my debt go away altogether, I’m not so stressed by it (as long as it’s generally going down).
I agree with the person who said it comes down to psychology - even if I’m doing the most mathematically efficient process, it still comes down to a psychological thing for me too. But I do research - I’m all about numbers and evidence.
January 25th, 2008 at 12:57 pm
Our case is slightly different. We are infact paying off the debt that has no interest - the money that we borrowed from our parents and the credit card debt that has 0% interest rate for another 8 months. Looking at it from another perspective, these are also the debts with the smallest amounts. Our approach would never be the same - sometimes it would be interest rates and other times it would be the total debt amount. We would concentrate on these two which we are expecting to be done with in the next couple of months. Once this is over, we are going to boost our emergency fund. And after that we are going to pay down 2 higher interest rate debts - our 2nd mortgage and auto loan. As you have mentioned, it is about what bothers you most.
January 25th, 2008 at 3:27 pm
Since I’ve only just recently started on the debt payoff, I haven’t really developed a great system yet. I’ve spent a lot of time thinking about it though and I’ve got a good draft saved on my site that I’m still working on. But for now I’ve been kind of hit-and-miss.
I just paid off a small balance debt just because it was really inconvenient to pay it every month, since they didn’t have online payments set up. The next one that I’m working on is the one with the highest interest rate, simply because they annoy me so badly. I guess that makes me a “gut” person for now.
But I’m working out a good system that I hope to publish in the next week or two.
January 25th, 2008 at 6:26 pm
Interest rate for me, too. I made up a spreadsheet and played around with the payment amounts to figure out the fastest way to pay everything off.
I targeted the high-rate card with some of my savings, then did a balance transfer to a 0% for 12 months card offer. I pay the minimum on that, but I set aside a fixed amount in savings so that I will be able to pay it off before the 0% offer expires.
I have turned my attention to the second debt, which is at a much lower interest rate. I make a good-sized payment each month, and I pay extra snowflake amounts to that debt to reduce the amount of interest I pay.
Both debts will be gone within a couple of months of one another. Looking at the spreadsheet made it clear that interest-rate order was the fastest way to get out of debt, because the money I save in interest is used to pay down the lower-rate debt faster. For me, the prospect of getting out of debt sooner far outweighed any little psychological boost I might get from paying the lowest balance first.
January 25th, 2008 at 6:37 pm
All of my debts have nearly the same interest rate so in the end, the only difference in interest paid would be (literally!) two cents. So I’m going to go with lowest-to-highest for the following reasons:
1) Negligible difference in interest paid.
2) My most hated bill is for Dell. Lowest-to-highest, I’ll pay them about $90 in interest. Highest-to-lowest, I’ll pay them $225.
3) It doesn’t seem as insurmountable when I do this. Last summer, I was able to pay off two low balance cards because I was super careful about following my budget. Then summer ended and I went back to school and didn’t pay any attention to that silly little budget. But knowing two are paid off (and staying paid off!) feels really good.
4) My goal is to have all of them paid before September, when I plan to move out of state for school. Either way, if my current pay stays the same, I’ll still be paying SOMETHING until November 08. And either way, the same amount of money will be put towards a bill, whether it’s one (the final, highest balance, card) or two (Dell and a department store card). It’s going to be the same payment total either way. So I’d rather just have ONE card with a balance than TWO cards with the same total balance.
Once this semester is over, I’ll hopefully be able to pick a part-time job in addition to my full-time one I’ve already got, which will help so much. I don’t have any breathing room this month and I’m counting down the days until February 1 when I get my paycheck. God, I can’t believe there are only 31 days in this month. Feels like 87. Tuition cut out a HUGE chunk of my paycheck this month. It hurt way more than I expected. I had to pull money out of my (very very small) savings account.
My real plan to get out of debt, though? The best one ever? Enter a radio contest and win $25,000! Okay, okay, so it’ll never happen, but it was free to enter. I would be the happiest girl in the whole USA if it did, even if I would have to send half of it to the IRS.
January 25th, 2008 at 6:39 pm
ALSO, I’m sure you all already have spreadsheets, etc., that work for you but I just found two that work really well for me and involved no real work from myself. So I recommend them if you’ve got Excel.
January 26th, 2008 at 7:21 pm
We are lowest balance to higher balance. There is just something so motivational about getting a card paid for that gets you psyched up to tackle the next card. On the other side of this, it just so happens that our lower balance cards have the highest interest rate.
January 27th, 2008 at 12:38 am
We went with the one that bothered us the most first - a loan from my in-laws. Then interest order, which was still in line with what bothered us as it was pretty annoying to be paying all that interest!
There is something to be said for the psychological boost of paying off a debt, though. We spent quite some time on one card and it drove me crazy! I couldn’t wait to cross that one off.
January 27th, 2008 at 8:26 pm
Our method seems to vary……quite often
When we first started attacking our debt (5 months ago), we started with the highest interest method.
After a few months and a few debts paid off, we then decided to omit one of our higher interest loans (RV loan) from our snowball plan because the interest paid on that loan is a tax write-off.
Then, we transferred some of our credit card debt to a 0% card so now that debt has become a priority since that interest rate will increase in 11 months.
Once the 0% card is paid off we will readjust our plan.
Most likely, we will try to eliminate the rest of the credit card debt. Because I too hate credit card debt!! Grrrrrr!!
January 29th, 2008 at 11:53 pm
We’re paying the lowest balance, and unfortunately the lowest interest rate first, simply because we’re pissed off at Chase. They closed our home equity line of credit when we refinanced, without our written approval (and with a subordination agreement in place). This goes against their own stated policy but it’s not illegal in California so, hey, they just did it. After that psychological boost, we’ll switch to highest interest rate order for the rest of them.