Where do I even start? Paying off debt..

posted 2 months ago in Finances
Post # 17
Member
1284 posts
Bumble bee
  • Wedding: August 2017

kmbumbee190618 :  I would pay off credit card first (assuming the 0% interest doesn’t last forever), then tackle the $9k student debt, then the $27k student debt. You’ll pay the car off over the same time making your $500/month payments. Stop contributing to savings (since you have an emergency fund) and stop contributing to retirement. 

Also, since you have a savings fund on top of the emergency savings, if it is more than $5k I’d use it all to cover the debt (except 6 months of emergency fund). It sounds crazy, but once the debt is gone, you’ll rack up that savings again fast. Even though your interest is low, it’s still worth paying down the smaller debts quickly because you can use those chunks of money to pay off the higher debt after.

my debts are similar to yours ($41k and $8k student loans for my doctorate, no credit card debt and car is paid off). I found Dave Ramsay a bit too late, since we are now dealing with infertility and therefore are prioritizing dumping all extra money into that while making the minimum payments on the student debt (due to age, fertility treatment can’t really wait and we may use $20-30k in fertility treatments in the next couple of years). I wish I had tackled my debt 5 years ago because I could probably be close to debt free right now if I had been diligent back then. If we were to naturally get pregnant I would immediately pay off my $8k loan and put another chunk of change onto my larger debt. 

You’ll get there and you’ll change your spending habits immensely along the way! 

Post # 18
Member
177 posts
Blushing bee
  • Wedding: August 2018

TravelingBride31 :  I think there are 2 schools of thought on this one. If I were upside down, I’d take a loss on the car, roll that loss into a new loan and get a less expensive car with a much smaller payment and hope to get a better interest rate. Unless you know the car will last you well past the terms of the loan, driving it into the ground isn’t always the best option. 

Post # 19
Member
1137 posts
Bumble bee
  • Wedding: June 2016

sarfin914 :  Guess it depends on other financial considerations and the expected lifetime of the car. I think a fairly detailed analysis would be needed to figure out which option puts you furthest ahead financially. 

Post # 20
Member
272 posts
Helper bee

So this is how I would attack them if I were you:

I would use a snowballing method and decide the total amount you can afford to put toward your debt each month (ex. $1500). Pay the minimum on all loans and your regular car rate and put all the rest on your credit card. 0% interest is great but when it’s over it will shoot up to +20% and if you still have $5000 it will be crippling. 

Then when your credit card is paid off focus on your highest student loan interest rate and pay the minimum on the car and SL#2. Put all the rest onto SL#1. When it’s paid off then finish SL #2. I would pay your car off last because you already said you will be keeping it indefinitely and the risk on that debt is the lowest.

The other 3 are your riskiest debts because credit card interest is very harsh and student loan debt is VERY hard to dispose of in a bankruptcy. Not that you will file bankruptcy but that fact makes it a debt you don’t want to carry longer than you have to. Good luck!

Post # 21
Member
9206 posts
Buzzing Beekeeper
  • Wedding: August 2012

kmbumbee190618 :  Almost every card on the Discover website is 14 months. I would be very, very cautious of thinking it’s magically going to be 0% forever. 25% interest on $5k will drown you.

Post # 22
Member
7075 posts
Busy Beekeeper

anev :  I have to disagree strongly on stopping retirement! First, if she’s getting any kind of match stopping her contributions would be throwing away free money. Secondly, she’d be giving up years of compound interest and left playing catch-up on the other end. I agree with stopping regular savings since she has enough, but I wouldn’t stop retirement savings for only about $60k worth of debt. 

OP – call discover because it can vary widely. I have one 0% card that was for 5 years! I’ve also had ones that were 18 months. Also ask if it is interest waived or interest deferred. That makes a huge difference. If it’s waived you’d only start paying interest on the balance remaining after the promo expires. If it’s deferred it means that all of the interest has been calculating in the background waiting for you to not pay off the debt before the promo expires and then will get tacked on. If it’s deferred you absolutely need that paid off before the promo expires. 

Post # 23
Member
680 posts
Busy bee
  • Wedding: February 2020

kmbumbee190618 :  I don’t want to scare you, but I think you need to pay off your Discover ASAP with your savings. Discover has 23-25% APR and it sounds like you had the 14 months introductory rate. They do NOT offer 0% APR lifetime (as far as I know–someone please correct me if I’m wrong), so my guess is either this month or the month after, you are going to get hit with a very large bill. Doing the math, 23% APR on what you owe ($5,500) is $1,265. Not to mention, having this high of balance is hurting your credit even if you are making the minimum payments.

But please, call them today with the number on the back of the card and ask them how long your introductory APR is scheduled for. I would hate to see you have to pay that much in interest!

Post # 24
Member
4098 posts
Honey bee

I would need to know when the no interest period on the credit card ends and exactly how much extra above and beyond the minimums you have available to pay to give a truly informed opinion. 

But based on what you have written, I would prioritize the credit card to get it paid off before no interest period ends.  Is it a safe assumption you aren’t adding any new debt to the credit card each month as well?

Assuming your car loan works similar to mine where there is no penalty for paying it off early and extra goes towards the principal, I would do the car loan.  I would also look into interest reduction options  where you have the loan or see if refinancing  is possible. For my credit union offers rate reduction for automatic payments and also if you open a savings account and direct deposit $15 per month. I would also look into this on your student loans. I got a .25% interest rate reduction for signing up for automatic payments. Then I would tackle the two student loans starting with the higher interest rate.

But there are debt pay down calculators out there that will help you make this decision based on your specific personal circumstances. Just Google debt paydown calculator. I know Bankrate has one where you can put when intro rates and and what the normal rate will be as well as other factors like how much additional money you can put towards your debt above and beyond the minimum payments. Then it will calculate for you where to put those payments to be most effective and also give you an amortization schedule so that you can see exactly how much interest is being accrued and the overall effect.

Post # 25
Member
3090 posts
Sugar bee
  • Wedding: January 2021

I’m absolutely boggled by the idea that your credit card has no interest… I’d clarify with the issuer because I have a feeling that at some point the zero interest period comes to an end and you’re suddenly going to owe like 20% interest on a massive sum. 

Are you 100% it is zero interest end of story? Or is it zero interest up to a certain spending limit or zero interest for a certain period after the purchase? I dunno, it just seems super strange to me and makes me nervous.

Regardless, when it comes to prioritizing debt, always, ALWAYS prioritize the higher cost debt. Typically that means whatever loan/credit has the highest interest rate, after accounting for any relevant grace periods or product bundling that might result in lower fees or rates one something else (like of having x amount on a credit line lowers your interest and/or fees on another loan product and those savings make up the difference between the higher interest on this product than the next highest). 

If you have multiple debts though, you will want to consolidate the debt. Basically, you’d have a financial institution purchase your outstanding debts and consolidate the total amount into one loan with one interest rate, which will more often than not end up being lower than the combined average of the interest rates on your multiple loan products. It also means you are now only paying interest on one loan intead of on mulitpmu loans all charging you interested at the same time. 

No matter what you do, your first step should be scheduling a meeting at your primary financial institution. Banks don’t typically charge for their time. They want your business and they want to put you in a position to be able to service your debt to them, keep your savings with them, and eventually have the stability to be able to take out bigger loans from them, like mortgages, and buy their investment products. So make an appointment with an advisor and find out what they can do for you. 

Post # 26
Member
1284 posts
Bumble bee
  • Wedding: August 2017

LilliV :  I stand by my recommendations (unless her employer matches, but op didn’t specify), yes she’d lose on compounded interest for a short period of time, but if she gets her debt under control she will be able to invest even more in retirement in the long run. Op didn’t also specify her age, so i think that matters a great deal as well. I also made my recommendations based on op hard no of selling the car (so imho she can either be paying off the car or adding to retirement but she cannot afford to do both with her debt).

I’m scared for op due to her naivety regarding the credit card and I would use savings/emergency savings to pay it off (and cut it up) because 22-25% interest will be a bombshell.

 

Post # 27
Member
3090 posts
Sugar bee
  • Wedding: January 2021

One more thing to add about consolidation: I don’t know where you live but if might be worth looking into whether there are any government backed organizations in your area that provide low cost credit counseling and debt consolidation. Here in Alberta we have a program called “Money Mentors” that is backed by government and helps people consolidate their debts into bigger chunks with a more manageable interest rate than most banks would offer. 

Also, like PPs have mentioned, student debt is generally not considered “bad” debt so as long as uyo continue making your payments your credit rating should actually benefit from your current situation, not take a hit. I’d start paying more than the minimum on your credit card though, and look into either consolidating your car payment with your student loans through a bank or other organization like the one I mentioned, or of you’re able to afford larger payments, see if you can renegotiate your car payments to increase your monthly payments in return for a reduced interest rate. 

At the end of the day, the banks and the car dealership might say no, but they also might say yes so it can’t hurt to ask! 

Post # 28
Member
4098 posts
Honey bee

I took so long writing my post that you hadn’t posted your update yet. You need to get on the phone with discover immediately and clarify that. Period. You may be hit with a very nasty surprise very soon if you continue with your laissez-faire approach to that bill and don’t know the exact terms of it. If that introductory rate is ending anytime in the next few months and if it is interest deferred, then I would be tempted to tell you to take your money from savings and pay that bill off now. And then never put any more on that card then you can pay off at the end of the month. Treat it like a debit card, not a credit card.

If you do end up having to take your money out of savings to get that Discover Card paid off immediately, then I would treat your savings like a bill and put whatever your minimum monthly payment was on that Discover card towards paying yourself back in that savings until you build up the same cushion you have right now. I wouldn’t put a lot in savings until you get your debt paid off because you will be accruing more in interest than you would be earning an interest on the savings, but I still think you need to have at least a little cushion for things like unexpected car repairs. Because otherwise if something should happen, you’re stuck putting it on the Discover card that will potentially have 20% or more interest.

On the off chance you are extremely lucky and just have no interest on that Discover card for the rest of your days, then I would move that to the end of the line in terms of what you pay the most money towards first.

Post # 30
Member
10185 posts
Sugar Beekeeper
  • Wedding: November 2010

jellybelly326 :  

Thank you, Bee. Looking at YNAB right now; this looks very promising.  Now, to get Dh on board.

We have got to do something, before things get messy.  I’m a spender; Dh lives in denial.  Not an ideal combo.

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