Comments on: How I Got Out of Debt: Part III

By: Peterson

Peterson — Mon, 06 Apr 2009 01:57:53 +0000

Thanks for sharing.It is useful for me.

By: 444

444 — Fri, 06 Mar 2009 14:23:23 +0000

Kristy, I hope you don’t mind if I say that I’m glad to see you started out with the stinky Providian, Fingerhut, and Aspire cards. It makes you seem more human and not as much of a scary banker-type! :oD

Even greater that you paid those off. Do you know what the default rates are on those cards? They probably assumed you’d stick them with the bill (nothing personal, that’s just the type of customer they cater to) but you proved that you are not that kind of person and you earned the right to move on to better credit.

By: Mr. NtJS

Mr. NtJS — Thu, 05 Mar 2009 20:24:54 +0000

@ kosmo

What she’s referring to is the psychological boost she would have gotten by knocking out a debt. No matter the size of the debt, having 2 done as opposed to 1 feels more like progress. That’s not financial savvy, it’s personal savvy.

I couldn’t resist. This is always an interesting debate – balance vs. interest rate. Based on your list of four debt – post negotiation – there is very little difference financially between paying these based on balance vs. interest rate. I ran the snowball 3 ways – A: based on $167.88 going to debt (as you allocated in the previous post), B: based on $439.38 going to debt, C: based on $575.13. B assumes a small ‘baby emergency fund’ first, then that money goes to debt as well. C assumes the baby E-Fund and stopping retirement contributions. All assume you stop adding debt, never add any more to the payment (other than what the snowball adds) and stick to the plan. Hold on tight.

Results of A:
Balance vs. Interest
-57 vs. 56 months
-$2804 vs. $2646 in interest
-at 37 months, 3 debts are paid off vs. 1

Results of B:
Balance vs. Interest
-17 vs. 17 months
-$736 vs. $704 in interest
-at 10 months, 3 debts are paid off vs. 1

Results of C:
Balance vs. Interest
-13 vs. 13 months
-$531 vs. $509 in interest
-at 8 months, 3 debts are paid off vs. 1

In your case, there really isn’t a hill of beans difference between sorting by balance vs. interest, with the exception of knocking out debts faster. In each case, the first debt gets paid off ~3x faster when you sort by balance. Even in case A, the difference in interest $158 over almost 5 years. But the debts pay off at 6, 16, 37 and 57 months vs. 23, 44, 47, and 56.

By: kosmo @ The Casual Observer

kosmo @ The Casual Observer — Thu, 05 Mar 2009 16:30:56 +0000

I’m not sure what your point was regarding the two cards at the same rate. If you had paid off the smaller debt instead of paying interest on it while you “hacked away” at the larger debt, you would have paid less interest on the Aspire, but more interest on the Capital One (because you weren’t hacking away at it, causing its balance to remain higher). In other words, if you had paid down Aspire principal @ $100 per month, after 3 months, you would be paying interest on $260 Aspire debt and $2564 Capital One debt – $2824 total. On the other hand, if you paid down $100 principal on Cap One, after 3 months you would be paying interesting on $560 Aspire and $2264 Cap One – again, $2824 total. The net impact is the same, so I don’t think to made a mistake.

Unless you’re referring to the peace of mind of being able to pay off a card – obviously you would have achieved that earlier had you focused on Aspire, and the moral boost might have been helpful.

FYI, I’m hearing of more companies doing what you describe with the Target card. They might have only made to offer to ensure getting the $200, but that doesn’t change the fact that it was a good deal for you.