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Paying debts from smallest to largest

Posted by sassitabbi (My Page) on
Tue, Nov 7, 06 at 22:49

Has anyone tried the Leo Quinn theory to totally eliminate debt? Kind of goes like this, don't worry about paying off the high interest loans or credit cards. Just pay off smallest loan then apply that money to your next smallest bill, plus the minimum you've been paying. Hope I explained that well enough


Follow-Up Postings:

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RE: Paying debts from smallest to largest

I have heard of this suggestion
The only thing you didn't mention is the need to make the min. payments on the high interest card.
The only problem with this theroy is if the higher rate cards are at 21 to 25% your monthly min reduces the balance by only a few dollars and if you are close or at the credit limit you run the risk if you are "1 minute" late of having the late fee take you over the credit limit causing not only late fees but over the limit fees.
What I have suggested to many is look at your statement add the interest ammount to the min. payment. any extra available money can be applied to the smaller balances and as they get paid off use that monthly payment toward the next.
So, similar theroy but by adding the interest to the min. payment on all account balances will be reduced.
karla


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RE: Paying debts from smallest to largest

Like myfask says, it depends on your interest rate. I acually like this method, but none of my rates were over 14% at the time.


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RE: Paying debts from smallest to largest

This sounds like the Flylady and her advice to first, just keep the kitchen sink clean and then start cleaning more and more, a little each day.

I don't think finances work that way, but it may be a motivator. You can use the same "little bit at a time" idea with paying down the balance on the credit card with the highest interest rate...until it's paid off and canceled. Then, on to the next one. Of course, if you can transfer the high-rate balance to a low-rate card, that's going to make it easier.


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RE: Paying debts from smallest to largest

Hi sassitabbi,

No reference was made as the rates of interest being charged on the various accounts.

If they are comparable, what you say may be a useful way to proceed.

I think that it's important to make at least minimum payments of the other accounts, including, as someone suggested, extra if you are nearing your credit limit.

It is most efficient to make those extra payments on the account which is charging the highest rate of interest - but if the account is larger, and it takes longer, the payer may become somewhat discouraged with the plan.

I'd suggest cutting back substantially on expenses for some time in order to get those balances owing paid off sooner, for the interest rates that they charge are usually high.

The smartest way is to cut expenses pretty well to the bone for a while and get those credit card debts paid off a soon as possible.

By the way - do you know what rates you're paying?

If not, first thing is to check them to find out.

Good wishes for learning how to manage your money effectively - either you boss it, or it (and the lenders)'ll boss you. Not a good way to fly.

ole joyful


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RE: Paying debts from smallest to largest

Having any plan to pay back debt is a whole lot better than having no plan and hoping there will be enough left at the end of the day to reduce the debt. Doing something systematically is well worthwhile.

The psychology of reaching a milestone goal, having something paid off, is a great motivator. It is a lot easier to see progress if there are fewer loans, when you have paid some amount on your debt, than if you have just reduced the total by the same amount.


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RE: Paying debts from smallest to largest

"...don't worry about paying off the high interest loans or credit cards. Just pay off smallest loan..."

Sorry, but I don't buy it. Assuming that you are able to pay at least the minimum on all your outstanding debts (otherwise you're in real trouble!), it seems to me that it has to be right to pay off the loans with the highest interest rate first.


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RE: Paying debts from smallest to largest

I'm another one who thinks you ought to deal with "minimums" monthly and focus your attention on whittling down the balance of the higher intersest cards. (And DON'T, for heaven's sake, continue to use the cards!).

My father used to "save" pocket change religiously. I never paid much attention to what I always considered an idiosyncracy. Until I happened to see Suze Orman on the Oprah show one day. The topic was how to deal with staggering debt loads. And she was blunt about the necessity of paying down the principal. She advocated using only paper money to pay for things and pocketing the "change". AND SAVING THE COINS, making a deposit to the checking account and writing a check for that amount to the bill with the highest balance, noting that it be applied to PRINCIPAL. She said the average person would have between $30-125/mo. to apply to outstanding balances.

I started doing it with a car loan. I had about $30/mo. "extra"... knocked about a year off the term of the loan. IT WORKS. And it was the second time I really saw how whittling down the principal can save you interest money over the long term.


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RE: Paying debts from smallest to largest

The assumption (and I think it is valid) is that into your life a little more rain may fall. If you have 4 accounts on which you pay $100 a month each and you pay off the smallest one, you will only be under a $300 monthly obligation. You can use the newly freed $100 to pay down the next smallest account or, if you have to, you can use it toward your next emergency. This is the safer approach for most people. It depends on your circumstance of course and just how high the highest interest rate is.


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RE: Paying debts from smallest to largest

I understand the principle, but I don't think most of the heavily indebted have enough understanding of the CONSEQUENCES of compounding interest to appreciate the impact dedicated payments to principal can have until they DO it for a few months and see the "minimum payment" reduced because they've knocked down the principal. Once they begin to "get" the link between principal and compounding interest charges they're on their way to avoiding the revolving debt ("I can make the payment") pitfall.

This is not to say, they couldn't SPLIT the "pocket change" between a couple of payments...

Knock down the principal! do it monthly... this will give you leverage to negotiate a LOWER rate on the larger balances. The object of the game is regular payments that chip away at the principal and avoid late payment charges. The point is, you want to incur no more debt than you already have! Little bit by little bit, that's how you'll get out from under the debt. (it was little bit by little bit that GOT you there, after all!).


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RE: Paying debts from smallest to largest

I thought the plan most often recommended was NOT to pay the SMALLEST bill, but to pay down the HIGHEST RATE first.

And that you pay the minimum on the lowest rate, but pay big payments to the highest rate. Hopefully you'll see those monthly bills start to fall, but the biggest thing is, you'll pay less when all is done.


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RE: Paying debts from smallest to largest

I pay more than the minimum on my two long debt cards and pay the third card off every month.I just bought a new(2500 mi.demonstrater car for considerable off) that has put a big crimp in my spending style,but my old car was on its last legs. I'll have to pay the minimum on it for a while tho i'll keep paying more than minimum on my other bills.
oakleif


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RE: Paying debts from smallest to largest

"The assumption (and I think it is valid) is that into your life a little more rain may fall. If you have 4 accounts on which you pay $100 a month each and you pay off the smallest one, you will only be under a $300 monthly obligation. You can use the newly freed $100 to pay down the next smallest account or, if you have to, you can use it toward your next emergency. This is the safer approach for most people. It depends on your circumstance of course and just how high the highest interest rate is."

No, it's not valid. This only even applies if all your debt is fixed-payment (traditional mortgage or car payment, for example). Credit cards, HELOCs, store accounts, etc required minimum payment are all based on your outstanding principal, and the higher your interest is, the more you have to pay every month just to keep your principal from increasing. You don't suddenly "free up" $100/month at the end, you continuously "free up" $5 this month, $5 more next month, etc, and by paying down your higher rate loan, you're freeing up maybe $6 this month, $6 more next month, etc, rather than $5 so in a year you'll have freed up $72/month rather than $60/month. You will reduce your required minimum monthly debt payment (as well as your total debt) quicker by paying down the higher-interest debt.

There may be (certainly is) a psychological benefit to getting rid of a debt; if someone is needing a motivational boost and the difference in interest rates is minimal, it may be worth it to pay off a small account, but from a strictly $ approach, I don't buy it.


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RE: Paying debts from smallest to largest

I stand corrected. I have no experience with floating payment rates. But the situation is even more subject to "depends on the circumstances" than I thought as well. If there is a bill that can be erased while holding the line on the loan with the higher interest then it is permanently off your plate and can be a source of future borrowing in an emergency. I still think there is validity in that approach, but I admit it assumes a less overwhelming situation than what Quirk is suggesting


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RE: Paying debts from smallest to largest

cloudy 7,

And instead of getting the short term debt paid off in 2 - 3 - 5 years (at high interest rate, usually) ... you stretch it to 15 years or so, in a situation similar to a mortgage?

Paying interest is like throwing money down a rathole.

I prefer to hang on to it, using it to buy something to benefit me.

I want to get rid of the deal that requires me to pay interest to someone, especially in large quantities, as fast as possible.

Arranging the same sized loan, at a lower rate makes sense ... if one uses discipline to pay off the same amount monthly as one did earlier, meaning that, at lower interest rate, the total loan, including interest, is paid off sooner.

ole joyful


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RE: Paying debts from smallest to largest

I agree with what ole joyful said about exchanging short term debt for long term debt. Not a good idea.

The other problem with debt consolidation is that many who take out these loans, pay off their credit cards and then start using them again. They don't change their spending habits (and paying debt habits) and end up in worse financial condition.


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