Paying Off Credit Card Debt

My apologies in advance on the poor lighting. Still working on that…

When you’re in debt and you have managed to save a bit of money, by far the best investment the majority of people can make is to put it toward credit card debt. First, the interest rate that is being paid on the credit card debt is likely much higher than any return you can get from a standard investment. Secondly, there is absolutely no risk in getting the return — it’s 100% guaranteed. In addition, there is no tax paid on the return. The question is how to get the best return when you have a number of credit cards.

Some recommend that you pay off the credit cards with the lowest balance first for “psychological reasons” by making it appear that you are paying off your debt quicker, While others (including me in this camp) believe you should pay off the highest interest credit cards first.

As with many issues in personal finance, you’ll need to decide which method is more beneficial for you. The key here is to make sure that you use the savings you receive from the painless saving exercises we give to begin paying down this debt.

This entry was posted in Credit Cards, Debt, Personal Finance, Saving Money. Bookmark the permalink.

7 Responses to Paying Off Credit Card Debt

  1. makingitbig says:

    Jeff — would you say this applies to school loans, too? I’ve got a $14k loan at a 5.30% interest rate, but I’m not 100% sure that I want to spend my extra dough on the loan instead of investing in a savings account.

    What do you think?

  2. pfadvice says:

    I do see a student loan as different from credit card debt. That being said, even with your loan being at a fairly low rate, you’ll still come out ahead by paying it off rather than placing the money in a savings account. You may, however, want to look at your options a little differently than if you had 18% credit card debt.

    With the student loan, you aren’t freeing up extra credit when you pay off the loan. That means if an emergency occurs, you may have to borrow at a higher rate than you were paying off the debt (for example, if you put it on a credit card with 18% interest) Therefore, it would make sense to have an emergency fund for unexpected expenses (or at least free credit with a low interest rate). Once that is in place, I it still makes sense to pay off the loan than let extra money sit in savings in my opinion.

  3. Mr. Blue says:

    Here’s my plan which seems to be working quite nicely. I have 24k in student debt at 3.5%, and 4k in car loan at 7.5%. NO cc debt at all.

    I’m paying off the car first, THEN using the $150 increase in disposable cash to put toward the student loans. For me at least, paying the highest interest debt seems to work a LOT faster. Another thing I like to do is pay 10% of the outstanding balance versus the minumum payment, you save TONs of interest that way.

  4. makingitbig says:

    I don’t want to take this conversation too far off topic, but one of the things I’m trying to figure out is the best way to allocate the “extra” money we bring in.

    We have no other outstanding interest-generating debts besides the student loan, but we do want to save some money for a honeymoon, other travel, etc. Is there a suggested % of “extra” money to go toward a loan as opposed to savings?

  5. pfadvice says:

    I don’t think there is a standard rule of thumb % since it really is dependant on your particular finances. I think what you need to do is look at all the things you want to save money for, estimate when and how much they are going to cost and then work it into a budget dividing the money toward the two as best fits your needs and goals. Just remember that all those things that you are saving money for now come with a 5.3% premium on them…

  6. John W says:

    Excellent advice.
    I like the idea of a video.
    My comment or addition is to tell your readers to not only pay out their credit cards, but to pay before the due date.
    The suggestion is to pay it when the bill arrives in the mail.
    Why do this? Well, quite to my surprise, I have discovered that by doing this your credit score will increase faster.
    Just as if you continuously pay late, your score slowly drops over time, the reverse also holds true.

    Just a quick tip for everyone.

  7. Codeweb says:

    Hello All

    Here is the dilemma I have – hope someone can help.

    Credit Card 1 – American Express Blue
    Total Credit Line $17,000.00
    APR 8.990%
    Debt to Credit Ratio 11.93%

    Credit Card 2 – Mastercard
    Total Credit Line $25,000.00
    APR 10.990% first $12,000 – 3.990% remainder
    Debt to Credit Ratio 60.60%

    Above is what I approximately owe – I have $5,000 in savings I would not like to use (saving it in case of an emergency) – I can pay this debt off in the next 2 years.

    I would like to know from the experts – should I open a 0% APR credit card – I have offers for this rate for 2 years. My FICO score ranges from 736, 753, 764.

    Is this a good idea or not recommended – my Debt to Credit Ratio will decrease but how badly will it effect my credit. These are the only 2 credit cards I have.

    Thanks in advance !!!

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