Credit Card Companies

Most likely, your credit is already pretty bad -if youve maxed out a card like that(also i assume it is one of many credit cards in your name) and they automaticly lower you-do yourself a favor, forget trying to pay off the credit cards-start putting aside money you send them and only buy things when you have the money to do so-that is the only way to break the cycle-yes your credit will be even more screwed than it is but you will essentially force yourself to do without them for a while until your credit comes back up

 

My credit is not great but it is not awful either. Other than that little fiasco with Embarq I have not missed or been late on a payment in years.

I am trying to follow the Dave Ramsey method of paying off my smallest debt first then using the debt snowball. I am putting an extra $1000 per month above my minimums with my payments. I will payoff my car with the pay check I receive at the end of May. Once that is done I can put that money towards that credit card. At $1500 per month it wont take long to pay off a $6800 balance.

 

Does Ramsey advocate paying off the smallest debt rather than the debt with the highest interest rate first?

 

VA, he does because he views it as a psychological thing. People will get more fired up if they pay off something and he advocates taking that payment for the smallest and adding it onto the payment of the second smallest (and adding extra onto it of course). That is what he calls the debt snowball. Honestly, interest rate differences won't make a huge hill of beans for most people. Winning (ie paying off a card) will is how he sees it.

For example, if I have a card with 1500 at 10% and a card of 2000 at 12%, most people would say to pay off the 2000 first. In the end, that would save you $90 over a year (or 2 starbucks coffees in a month) but the problem many people have is that if they don't see some kind of immediate success, they give up (similar to how everyone wants to lose weight at the beginning of the year and very few do because they don't see immediate results).

I know for my wife and I, we had two small cards that we had just been dragging along and it really did feel good to knock those out quickly and move onto the bigger stuff. It also free'd up that money for us to use on something bigger.

 

I can knock out a $350 per month bill by paying off my car. I can also reduce my insurance bill by dropping collision. I can do this in a couple of months. Once that is done I am in better shape from a cash flow perspective should negative impact my finances.

If I had it to do over I would have paid my tax return money on my car as well. I would be paying it off this month had I done that.

 

Thelt, be careful on the collision piece. If you can't cash-flow buying another car, I wouldn't drop that. I know it seems like a lot but it's not as much as having to buy another car.

 

I could get another car pretty cheap, maybe not as nice as this one but one that will get me to work and back until I get out of debt.

 

I can understand that, but only for small debt such as the hypothetical examples you used. For anything large, like 10s of thousands, etc... I still think it's a better idea to pay off the highest interest debt first. If not, while you may get the satisfaction of paying off the smaller debt, you'll get reamed in the ass by the interest on the larger debt.

 

I had a 10K debt to pay off along with smaller CCs and we were really able to attack the 10K when we had the smaller ones paid off. Again, it's still not a huge deal either way but most people will stick with something more when they see results. The problem most people have is they don't focus and just pay a little more here and a little more there and almost nothing ever gets paid off and they say screw it. Ramsey sees power in focus so that is why he has it set up the way he does as he thinks people will stay more focused with early victories and their next target in front of them.

 

I did that a few years after college...I put all my cash to payoff the lowest balance, then felt like I accomplished something. I did that for three credit cards...once they were all paid off I went on a three day hooker and coke bender. They only took cash.