Comments on: number crunching: the interesting interest

By: lpkitten

lpkitten — Sat, 29 Mar 2008 02:34:34 +0000

when i was paying off my debt i chose to save the money in my savings account instead of paying it directly to the credit card. as long as you’re not paying any interest, there is no monetary benefit for you to pay it down. paying it down may help your credit score but most likely you’d rather have the extra interest money. just make sure you’re not tempted to spend it before you use it to pay the credit card!

By: RL

RL — Fri, 21 Mar 2008 18:49:09 +0000

I have been using the spreadsheet you sent me back in February to calculate our debt paydown strategy (I love that thing by the way - thank you!!). Like Jonathan, I also use a formula of “(interest rate / 12) * principal” to calculate the interest we will be paying each month.

My first thought is - the 3.5% you are getting now may drop a bit (or alot) depending on the fed’s continued mood over the next year. I saw yesterday that my ING rate is now at 2.9% or something horrible like that. (But, on the flip side, the interest rate drops are a huge help in paying down the one variable rate student loan I have, so I can’t complain that much.)

I thought about pursuing a similar strategy as this post - we have all our credit card debt on 2 cards now. $13,000 fixed at 1.99% through Jan 09, and $8200 at 0% thr. March 09. Our plan is to pay the $13,000 off completely before the rate expires, and then if it makes sense, find another 0% card for the $8200 (which we should have paid off by mid 2009 regardless).

2 reasons I’m throwing $$ directly at the debt instead of letting it build up and accumulate ING interest instead (and lets pretend my 1.99% is 0% for the sake of this discussion, because obviously at 1.99% I’m still paying interest so the paydown makes sense): 1) I agree that the psycological effcts of seeing the balance shrink will be motiviating - esp. because I have a whole snowflake theory and I want to see how that pays off, and 2) we’re in the process of changing our credit card rewards strategy (based off things I’ve read at FMF) - we just received a Blue AmEx, and the next step is to get a Chase Freedom Visa. I’m not 100% sure our credit is strong enough for the chase card right now (we’re both around 680-700) but I know that paying down the credit card debt will help bring up that score. So that’s my rationale. (These 2 cards will be used exclusively for monthly expenses and paid off in full every month. We do the same now with a gold amex, but I can’t stand the annual fee)

But if I was in your shoes - I might do the “put it all in savings” approach. Hey, $189 is a pretty big snowflake. Even if saving rates go down, you’ll still end up with at least $150 or so, right?

By: Jonathan

Jonathan — Fri, 21 Mar 2008 17:43:58 +0000

The calculation looks right, although I would have used a monthly interest rate rather than annual to simplify the logic (0.035/12).

Be careful not to underestimate the psychological benefit of paying off the credit cards. My wife and I started saving in a separate account, but didn’t really get focused on paying debt until we started putting it straight on the card. Watching the balance drop is what kept us going. With a high savings balance, it gave us the false impression that we had more money that we really did.

You also need to be careful about potentially dipping into the balance for “emergencies”. Paying off the debt is final, but saving it leaves you open to the potential for spending it on other things.

Sounds like you are doing great, keep up the good work!