Posted on Tuesday, 19th February 2008 by R.J.
I’ve read a lot of blog posts about paying off your high interest debt first. That by doing this, combined with the ’snow-ball’ method, will get you out of debt the fastest. I’ve been following this methodology for some time, but I’ve often wondered if it’s not the best solution for my particular situation. Let me explain…
The highest interest credit card I have is Capital One at 19.55%. Even if it was maxed out, my limit is low enough that my minimum payment would only be about $40/month. On the other hand, my loan on the GMC Sierra is only 8.0%. It seems like the smart thing to do would be to pay off my Capital One card, then CitiCard, etc. until I work my way down to the truck loan.
But what about my truck’s insurance? By not having the truck paid off, I’m forced to shell out an extra $143.00 a month for full coverage insurance. Normally, my vehicles are covered with liability + uninsured motorist. If I were involved in an accident, I would prefer to repair it myself instead of raising my deductible anyhow. Does paying off the high interest credit cards make up for this $1,716.00 I’m paying every year in unnecessary insurance? I’m not sure.
To me, it seems like the smart thing to do would be to do whatever I can to pay off the truck, lower the insurance costs, and use the money I’m saving (a whopping $564.79 a month!) to pay off the credit cards in very short order.
Any body have an opinion on this?
Tags: auto payment, capital one, car payment, chase, citicard, credit card, dave ramsey, debt reduction, discover, high interest first, interest rate, low interest rate, paying down debt, paying high interest cards fird, snowball, truck payment, walmart
Posted in Debt | Comments (3)
February 23rd, 2008 at 2:20 pm
I think you are right to pay the truck off first. I always aim to rid myself of a monthly payment if I can, regardless of the apr.
March 3rd, 2008 at 10:13 am
I am a fan of the standard snowball method, though I would handle the additional insurance premium as interest on the truck loan raising the APR. Assuming you have $16,600 left on the truck and are making payments of $570 monthly (includes the $143 additional premium), your new APR on a month by month basis is:
Month APR
1 18.34%
2 18.54%
3 18.75%
4 18.97%
5 19.20%
6 19.44%
7 19.70%
From a purely mathematical standpoint (as the snowball method is set up), it makes sense to hold off on paying more than the minimum on the truck loan for another six months until the effective APR is greater than that of the Capital One card.
Some people prefer to pay off smaller debts first for the psychological boost of eliminating a debt and have incorporated this into the snowball method.
March 3rd, 2008 at 10:24 am
Thanks Adam. I never thought of it that way. It makes sense, though.
I think that’s a good way to handle it as I’d love to get out from under that $570 a month payment.