The reason the snowball works rather than the “pay the least interest” method is this:
If you have ever run a race or done anything taxing…. when you can see the finish line and you just have a little bit more to victory, your body kicks in full force – it’s emotional.
When you see your smallest debt going away with “just a little bit more” you will find ways to scrape up that “little bit more” money and knock it out. When the extra $300 has you $50 away from wiping out a debt, you find that $50 under the couch cushions, in the car ash tray, your pockets, the used cds you sell….. That extra “burst” kicks in. When you start doing balance transfers and pegging at large debts first, or split your efforts, it all seems to far away that $300 a month is quite content.
Money is not all logic… it is emotional too.
Financially speaking, the best way to do it is apply it to the balance with the highest interest rate. Dave Ramsey’s way is to pay the smallest balance first to give yourself the feeling of accomplishment. It all depends on how you want to ffel about the debts. Do you want small victories along the way or do the small victories not mean that much to you? I would pay off the small one and then apply the rest to the $1800.00 balance. With the extra you have every month, that second will be gone in a couple of months.
I just read all of the various advice given and just like opinions, there are many. Some of the suggestions seemed complicated, almost need a calculator to computer which to pay off first.
Then was a suggestion about not trying to pay them all off. Many of the participants here are under the bondage of debt and want out – completely and forever.
I know there are many schools of thought, but as I keep reminding everyone, FICO a.k.a. Fair Isaac is an I LOVE DEBT score and you can live without one. That is not to say to destroy your FICO while trying to get out of debt, but to let it gracefully die as you pay off debt and close credit cards. If you insist on keeping them, keep on the oldest since 15% of a FICO is for credit history whereas on 10% is for new credit. The 30% on amount if debt is amount of debt as it relates to your max. So if you are at 98% credit limit as I am on 2, then your score is lower than it would be if you were at 30% of your credit limit.
One place I do deviate from Dave Ramsey, is that if you get a windfall and that windfall will retire a single debt with a large min payment, put it towards that debt. That allows you to increase the size of your snowball exceedingly.
You need to start saving an emergency fund. You will have debt and I can completely understand that you want to pay it off as soon as possible. But you need to start put money aside so this way you will never become dependent on credit cards ever again. Your emergency fund by the time its full funded should normally be 6 months of your living expenses. If you don’t have this or even start to work on this, you will always be dependent on credit cards in case of an emergency. My opinion…Put a partial of your money into savings and partial into your cards…If you got any small ones that you can eliminate, get rid of them…it is a mental thing…Then start tackling your highest interest rate cards….but dont forget that you need to have an emergency fund….So save as much as you can pay off.