What’s our next “Early Payoff” challenge?
Just last week, I broke the news that we paid off our $25,000 car loan in just 25 months. When we first bought the car, we weren’t trying to pay it off fast, but I just began putting increasing amounts towards each payment, and sending multiple payments each month, until this past January, when I decided to try to pay it all off by August. Well, we paid it all off 2 months earlier than expected, and almost 4 years early overall!
So you may wonder, what’s next on our list. Well, if you read the title to this post, you would know by now, wouldn’t you!?!
We have 2 student loans, one more car loan, and one credit card. Here are the details:
Student Loan 1: $15,000 at 6.25%
Student Loan 2: $11,800 at 5.75%
Honda Ridgeline: $23,000 at 4.5%
Credit Card: $10,000 at 0% (until November)
The Deciding Factors
Alright, I know I should pay down the highest interest rate loan first. It just makes financial and logical sense. But here’s the thing. I’ve been carrying $20,000 in credit card debt since college, and I am finally to the point of paying it all off by year-end!
You may have read one of my first posts a year ago that I have maintained an almost consistent 0% rate on my credit card debt for the last 6 years by transferring balances between cards. That’s also why I still have about 7 cards. Sure, I pay about $50-75 every 6-12 months for the transfer fee, but it’s a small expense that allows me to tackle other, less forgiving, debts.
Back to the point, I’m sitting here looking at that $10k balance thinking “we can pay that off before Christmas if we stick to our budget”. This doesn’t count what we put on and pay off each month for regular purchases. This is actually stuff I’ve been dragging around for over half a decade.
Skipping over to the other loans, I could pay off one of the student loans, but the actual biggest monthly payment is the Honda Ridgeline (about $450 compared to $200 for each student loan). If I pay that off, then I open up a big slot in our budget in case we need the extra cushion. But…it’s not the highest interest rate, and it would take at least 12 months to pay off. I want instant gratification!!!
So basically, I haven’t decided what to pay down first. We’re still considering selling the Ridgeline altogether, or trading down for something half the cost (used of course). I have another month before a couple grand frees itself up in our budget though (through regular paychecks). Maybe I’ll decide in a couple weeks.
Anyone looking to buy a low mileage 2006 Honda Ridgeline RTS in the D.C. area? Asking price is $25,000, which is VERY competitive after looking at the currently available Ridgelines for sale online.
You have to consider what the interest on your credit card debt will be when the 0% interest rate expires in November. If the interest rate jumps up a lot, it may be best to make the minimum payments on all your loans and funnel all of your extra cash into a high interest savings account. The 5% you can get in an on-line account is close to your other interest rates, so you won’t lose out much. Then you can pay off your card all at once.
There is another psychological thing to consider with your credit card debt. The debt is intangible. You’ve had it for over 5 years. Do you even remember what you bought with it? At least with your student debt and auto loan there is something concrete that represents the debt.
As you mentioned – killing that credit card debt will be a HUGE victory. 🙂
Couldn’t you pay off Student Loan 2 – $11,800 @ 5.75% pretty quickly. That would make more financial sense than paying off 0% interest debt.
The other thing would be to funnel extra payments into a savings account to get the interest until the 0% deal expires and then pay it off.
I know in the debt snowball approach you take the lowest balance first, but when its at 0%, you’re paying a high price for your desire to pay something off quickly – up to $300.
I’ll assume you can find another 0% offer for that credit card debt. If that’s the case, paying off anything other than Student Loan 1 first is throwing money away. Debt snowballs and other psychological nonsense are for people who are bad at math.
Punny’s right; you can’t change the math of snowballing debt.
But I disagree that the psychological stuff is “nonsense”. For somebody faced with 2 debts; one 20k at 15% and the other $2k at 8%…they’ll save money by paying the 20k debt first but I’d tell them to pay the 2k debt first every time. Why? It can be accomplished quickly and provides the motivation to get through the larger debt.
In your case, too, the gratification of knocking off that credit card debt you’ve transferred around for so long might be worth the student loan interest you’ll continue to pay.
Personally if I were in your shoes, I would sell the Ridgeline. Selling the ridgeline will probably cut 15-20k in debt instantly. Forgot about the 5 times a year you need a truck, and just borrow a friends, or rent a u-haul or home depot truck.
FWIW, student loan interest has some tax benefits.
Psychologically, the credit card debt even at 0% makes the most sense IMO.
And Punny Money, most people who are good at math don’t end up in debt. Psychology and behavior usually wins over theory/numbers, especially long term.
It’s alright Punny, I’m with you. Knock out the $11,800 debt first. It’s not much more than the credit card debt, but the fact that it has a 5.75% interest would be what hit me psychologically more than anything else.
Either way, you’d be scoring a psychological win by paying one of the accounts off. Might as well pay off the one that has the higher interest.
the problem is whether you can get another 0% cc to cover the $10k. if so, then i’d continue to maintain the $10k balance and payoff something else. if you are intent on selling the ridgeline, then do so, but don’t count the money until you actually have it. with that said, you should focus on the SL1, b/c it is the higher interest rate. i don’t see any psychological benefit between your debt, because the amounts are essentially the same. however, i’d be planning on what you are going to do in case you cannot get another 0% cc. in which case, i’d be putting the money into high yield savings account to payoff by the due date.
I have followed your webpage and just have to say something after this post and if possible I would like you to make a separate post about this. Here in Norway it is common to have a student loan (around 40 000 USD for 5 years in university) but other than that we usually do not use credit card loans. Is it just me or is it very common to use credit cards in america? Me myself does not like to use cc and only have one regular bank card which I use every day. Do you think this is because we can borrow a fixed amount of money while we study and manage to keep this as the limit? Is it more common in America to use cc and in that case, why? Is it because it is more difficult to borrow money while going to the university? Just some thoughts. Keep up the good work! Even though many of the advices and posts are towards people living in America I hope you can write more posts that can be read by a broader audience, in any country in the world.
another thought on the cc debt. i’d check your promo terms & conditions again to see if you are going to be subject to a year’s worth of interest if you do not pay by the promo end date. that would really suck.
Norwegianstudent: yes, it is very common to use cc in america, because they are so widely accepted. it is rare that you cannot use a cc to pay for stuff. moreover, cc companies make it enticing to use them by offering cash back or rewards for using them, and have enticing promotions which people tend to overlook the fine print conditions.
Depending on the terms of your 0% credit card offer, and the likelihood of you getting another card, I would pay off student loan #1 first.
Of course, that is assuming you won’t get hit with anything other than a transfer fee and -can- get another 0% balance transfer. Assuming that, yes, the highest interest rate goes first. There isn’t really that much difference between 11,800 and 15,000.
Let’s assume you can knock out the $10,000 in 5 months. That’s $2,000/month you are dedicating to debt (hats off to you!). I’m assuming that is how much freedom you have in your budget. So let’s look at this way:
10,000 @ 0% = 2,000/month for 5 months
11,800 @ 5.75% = $2,000/month ~ 6 months
15,000 @ 6.25% = $2,000/month ~ 7.5 months.
You’re looking at a maximum difference of 2.5 months. You’d be paying off the largest debt, and the highest interest debt.