I was looking at my debt balances the other day, and thinking about how much I pay on them in interest every month. My credit card balance currently costs me about $55 a month in interest charges, while my line of credit costs me about $85 a month in interest charges. For a little while there I was thinking "maybe I should pay down the line of credit first, it's costing me more in interest." For a couple days now that's what I'd been thinking I'd do *shakes head*, but I sat down and gave it some thought in terms of investments this morning. The money I put towards paying off the credit card is like investing money and getting a 12.9% return, while putting money towards the line of credit is like getting an 8.52% return. Sure, I'll feel better watching the total interest I'm paying decrease every month, but it will decrease at a much slower rate than if I keep paying off my credit card first, and I'll end up paying more interest overall. If I had applied my slightly confused money sense to all of my debts I would have had myself paying off my mortgage before I paid off my credit card. Doesn't exactly make sense, does it?
Some days I wonder how I got myself into this mess. Then I have moments like these. Then I remember.
*facepalm*
2 comments:
I like that you looked at the interest rate first. 12.9% vs. 8.5% is a big jump.. at least to me it is.
>>The money I put towards paying off the credit card is like investing money and getting a 12.9% return, while putting money towards the line of credit is like getting an 8.52% return.
That is exactly the way to think about it.
The only reason to pay off a lower interest loan is if you can pay it off really fast and thus increase your monthly take home. But that is only really important if you are strapped for cash and barely making it. Otherwise, yes, always focus on knocking out the highest interest loans first.
Post a Comment