I read a really good article online today about paying off debt. Logic states that you should pay off your higher interest rate debts first because in the long run, they’ll cost more.
Let’s say you have $400 to pay toward two credit cards. One charges a 10 percent interest rate and the other charges 22 percent. Naturally you would want to pay $200 each, but in the long run it would be smarter to pay off the higher interest rate card first. Instead, I’d make the minimum payment to the 10 percent card and use the rest to pay down the principal of the other card.
However according to the article, sometimes the emotional satisfaction of paying off something that reminds you of a terrible time in your life is a better option. For example, say someone was planning to get married and bought a $20,000 wedding gown, $5,000 for flowers (paid in advance), a deposit of $2000 for a church and reception area, etc. Then the groom breaks up with the would-be bride – he left her for her best friend. Yet the bride has accrued $27,000 on a new credit card just for the wedding. Every single month as she makes her payment, she’s reminded of the two horrible people who very nearly ruined her entire life. To get rid of that credit card (at a low interest rate of 8 percent) may be better for her psychologically than paying off another higher rate card.
… if the hatred you feel for a debt is keeping you up at night, feel free to attack it with abandon. It may not be costing you more than others financially, but sleep and peace are precious commodities too. In the end, says Crawford, any repayment approach can be effective, but “what really matters is staying motivated and seeing progress. Just find and plan and stick with it.”
Here, here.
Add to:
