So, a friend asks me what I thought of Dave Ramsey, and I had heard of him, but never listened to his show or sought out his web sight, so I took a look. I quickly found his approach to debt repayment which left with a big "huh?"
"Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball."
Then he goes on to say, "The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior."
Lean? The interest rate difference from a "good" card to a "bad" one can easily be 10%, that is, one card at 20% or higher, one in the low teens. Now, as I read his advice, he suggests paying the 10% debt off first if it's a lower amount as this will feel good once it's paid off. This is nonsense. I do believe your feelings got you into debt, the new couch made you feel happy for a time, the new watch, etc. Now is the time to use your head and do the right thing. $1000 against the 20% card is $200 less interest every year that you will owe. As you pay that high interest card down, more of your payment will go to principal. By coincidence I find this quote on a financial planning group's web page just hours after seeing Dave's debt plan;
"Pay Down High Interest Debt First. While it may seem obvious, we've seen many folks paying down low interest debt before their high-interest debt. One example is (low interest) mortgage debt vs. (high interest) credit card debt. Many people make extra principal payments on their mortgages while carrying large balances on high-interest credit cards."
I would interject here, that Suze Orman answered this month with a different spin. She says to pay (after paying all min payments, of course) the last aquired debt. This seems to help one's FICO score. I've not heard this before, but am keeping an open mind.
If you have a big pile of debt, treat it like that, one big pile. The fact that you may be writing 6 checks each money is a formality, the only thing that counts is that each month the total number is less, and that the high interest cards are the first to go.
List your debts, both balance and interest rates on a sheet of paper. Multiply to get a third column, showing the annual interest each balance is costing you. (Continued)