I was hoping to get some advice regarding my plan for paying down my debt. I'm planning to start using the avalanche method to start paying down my balances, but with a slight modification. I have several high-interest (40-80%) loans that I plan on attacking first. I also have several credit cards which are close to maxed out that are all between 20 and 25%. Recently, I got in the habit of calculating how much my bills will be that I can pay by credit card. When I get my paycheck, I transfer that amount to one of my cards and set up the payments for the bills to go through the day before they are due, maximizing how long that money stays on my credit card and ensuring I don't have any late payments. I'm hoping this reduces the amount of interest I'm being charged since my daily balance is reduced. I also allocate the amount I plan on using for groceries to another card and gas to a third. I feel this helps me stick to the budget since I cannot spend more than I allocated on the cards.

One thing I worry about though, is that I am using up the minimum monthly payment the way I am doing it now. However, if I am able to apply the money I would be putting towards the minimum on the cards towards paying off the loans instead (ranging between 40-80% interest) I think that would be a better use of the money. Not sure how the math works out for this.

My husband works as a contractor, so his income is very unpredictable. My income barely covers the bills, so I feel this is the best way for me to approach this situation. Food, gas and debt payments come out of whatever he makes that month. I have been trying to pay off debt and improve my credit history, but living in LA where cost of living keeps increasing is quite difficult. I know this is just the first step and once the loans are payed off I plan on tackling the credit cards one at a time, from highest interest down.

Any suggestions regarding how to do this better would be appreciated. Should I do this with my higher interest cards (25%), or lower-interest cards (20%) which have cash-back (1-1.5%)?

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    Your credit score may end up preventing this, but have you looked into getting a consolidation loan to get as much of that debt into one place as possible? Even if you can get something at 30%, it'd be miles better than 80%. – BobbyScon Jan 6 '17 at 19:33
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    Are you really paying 80%? I've never heard of a loan with such an astounding interest rate, except from a loan shark. Well, maybe I should ask what country you live in. – Jay Jan 6 '17 at 19:37
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    Sounds like you're actually dealing with an illegal loan shark. Legitimate pawnbrokers are only allowed to charge 3% per month in California: leginfo.legislature.ca.gov/faces/… – Ross Ridge Jan 6 '17 at 23:56
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    I suggest you pay your credit card bill the instant hubby deposits his check. Paying just before due is fine only when one can afford the inevitable missed payment. – bishop Jan 7 '17 at 4:27
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    @Jay, In many jurisdictions, there are legal loans which can have outrageous effective interest rates. Some payday loans can be over 1,000%; many (most?) are in the hundreds of percent interest range. – Makyen Jan 7 '17 at 18:59

Congratulations on recognizing your problem and getting serious about paying down your debt. That's the first step.

If you have a loan with 80% interest, yes, get that paid off as quickly as possible. Much better to be paying even the outrageous 20% on a credit card than the astounding 80%.

As others have noted, if you can get a consolidation loan or refinance that 80% to something more realistic, do it and do it as soon as possible. Heck, if you have the credit limit, use the credit card to off the 80% loan. 20% on a credit card is better than 80%. Of course you may not have enough credit limit to do that.

Cash-back rewards are nice if you are paying off the credit card balance each month. But in your case, you're not. 25% with a 2% cash back reward means you're still paying 23% the first month and 25% every month after that. That's worse than 20%. Remember you pay the interest on your balance every month that you don't pay it off, while a cash-back is a one-time thing. So if you're not going to pay off the balance, AT BEST a cash back reward could be effectively subtracted from the interest rate. 20% with a 2% cashback is effectively somewhere between 18% and 20%. If you're comparing 20% with 2% cashback to 19%, could be complicated to figure out which is better. But it's clearly worse than anything more than 20%.

Besides that, you don't say what your total debt is in relation to your income. If you have a lot of debt, I'd say first thing is to figure out what you can do to cut your expenses. Lots of things that people call "fixed expenses" aren't really fixed at all, they just take some effort to cut. Like if you have a big expensive house and you're paying a large mortgage, you can (probably) cut that by selling the place and moving to a cheaper house. (I say "probably" because the housing market may make it impossible to sell for enough to improve your situation.) If you have large heating bills, you can turn the thermostat down and get used to wearing a sweater around the house. Etc.

Final note: I've talked to a fair number of people with debt problems, and I often hear them say, "Yes, I really need to cut my spending and start paying off these debts. And I intend to ... right after I buy this one last thing that I really really want." But of course after that there's one more vital purchase, and then another, etc. Avoid falling into this trap.

If it's feasible, try to get one card down to zero balance, and preferably one of your cash-back cards. Then keep that at zero every month (pay it off in full), and use it for your purchases as you describe above.

The idea would be to get it so that you are not paying interest on your month to month purchases. This not only reduces the 20% or whatever that you're paying on that balance, but also the 20% or whatever you're paying on those purchases - remember, a card you carry a balance on charges you interest on those purchases from the current month.

If this isn't feasible (if these are all very high balance cards), then I suppose the way you're currently doing it would be okay, though I think you're overthinking things to some extent - but with 80% interest, if that's a significant pile of money, you may need to as clearly that needs to be tackled first. I think it's mostly better for you to pay your day to day stuff out of pocket and not use your cards the way you are suggesting, but with the 80% loan(s) you may need to.

The reason I say it's better not to use your card the way you suggest is that it is difficult to do properly and never get it wrong (i.e., never go over a balance), and it's also leaving you in the habit of using credit. It doesn't help you budget necessarily, either. Instead, set up a fully developed budget that includes all of those minimum payments and pay them. Certainly once you have the > 50% debt handled, I would switch to this method (not using credit cards at all).

You should also look outside the box. There are non profit credit relief organizations that will give you free credit counseling. Don't pay for it though. There are some organizations that are shady in offering counseling but they wreck your credit by asking you to stop making your payments. Some of the legitimate organizations out there have ties to credit unions and banks that can offer you some loans to consolidate your debt at rates lower than those you mentioned in your questions. You should probably also approach a credit union directly and discuss debt consolidation loan options. Even if you can only knock out the debts with the highest interest rate, that's a good first step.

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    Thanks Nathan L. Do you know of any legitimate ones in the US, or Los Angeles, CA to be more specific. I'm not sure where I would find those without risking falling under a scam. – user52102 Jan 6 '17 at 20:34
  • @user52102 Specific recommendations are a bad idea here, but look at this article for tips: articles.latimes.com/2008/dec/28/business/fi-consumer28 – Nathan L Jan 9 '17 at 20:31

First, pay off the highest interest first. If you have 80%, pay it first.

Paying off a card/loan with a lower rate, but a lower payment or a lower balance can help your mental capacity by having fewer things to pay. But, this should be a decision where things are similar, such as 20-25%, not 20-80%.

What about any actual loans? Any loans with a fixed payment and a fixed amount?

If you must continue to use CC while paying them off, use the one with the lowest interest rate.

Call all of your debtors and ask for reduction in interest rate.

This is not the option to take first... This is a strategic possibility and will cause credit score issues... If you are considering bankruptcy or not paying back some, then you have even more negotiation power. Consider calling them all and telling them that you only have a little bit of money and would like to negotiate a settlement with them. "I have only a limited amount of money, and lots of debt. I will pay back whomever gives me the best deal." See what they say. They may not negotiate until you stop paying them for a few months... It is not uncommon to get them to reduce interest (even to 0%) and/or take a reduction in the amount due - up to 25 cents on the dollar. To do this, you might need to pay the amount all at once, so look into loans from sources like retirement, home equity, life insurance, family...

Also, cut out all expenses. Cut them hard; cut until it hurts. Cut out the cell phone (get a pre-paid plan and/or budget $10-20/month), cut out all things like alcohol, tobacco, firearms, lottery, tattoos, cable tv, steak, eating out. Some people would suggest that you consider pets and finding them a new home. No games, no trips, no movies, no new clothes... Cut out soft drinks, candy, and junk food.

Take precautions to stay healthy - don't wear shoes in the house, brush your teeth, take a multi vitamin, get exercise, eat healthy (this is not expensive, organic stuff, just regular groceries).

Consider other ways to save, like moving in with family or friends. Having family or friends live with you and pay rent. Analyze costs like daycare vs. job income. Apply for assistance - there are lots of levels, and some don't rely on others, such as daycare.

Consider making more money - new job, 2nd job, overtime, new career.

Consider commute - walk, bike, take the bus. Work 4/10's. Telework.

Make a list of every expense and prioritize them. Only keep things which are really necessary.

Good Luck.

The Avalanche method does not work because most people don't have enough money to make an avalanche. If you somehow had a windfall that was greater or equal to your highest credit card balance, then by all means pay that one off.

However, most people do not have that kind of situation. Instead they should use the debt snow ball method. They only have regular income that is typically much smaller then the balances.

Another part of your plan that is especially troubling is that you are continuing to utilize credit cards. You need to cut them up, and stop using them. First of course save $1000 for a small emergency fund, the pay them off smallest to largest. Do a budget each and every month. Work an extra job or three. Any extra money that hubby brings in goes towards one of the credit cards.

BTW you don't have a math problem you have a behavior problem.

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    My understanding is that the avalanche works like the snowball, but prioritizing the higher interest accounts first so you save on interest in the long run. – user52102 Jan 6 '17 at 20:26
  • Your understanding would be incorrect not that there are not a lack of proponents. Use the snowball method and cut those cards. BTW I am 100% debt free now, a few years ago I almost lost my house because of debt. – Pete B. Jan 6 '17 at 20:32

A few points

  1. Yes, as a rule, it is better to pay down high interest accounts first, as this will yield lower cost in the long run.

  2. Credit card balance transfers usually come at a cost (typically something like "3% or $50, whichever is higher"). So instead of transferring the debt, maybe try purchasing items with your card instead of cash, and using the cash to pay down the debt. This has the added benefit of giving you points or cash back on the card (typically you won't get these for a balance transfer). Caveat: Only do this if you are very disciplined! It is very easy to run up high CC balances and forget to save the cash.

  3. You should leave a bit of unused credit line on your credit cards in case of emergencies. I'm doubting you can use your high interest loans in the same way.

You should check out Dave Ramsey's Baby Steps. He has an great and well organized plan for getting out of debt and building wealth. My wife and I have followed the plan and will be paying off our home this year :)

His advice on debt payments is to pay off the smallest balance first. This helps motivate you and your husband to push harder on your debts. Once the first pay is paid the money that would have gone to that debt is applied to the next smallest debt and so on. This is called a 'debt snowball' since by the end you will have plenty of money to pay that last few debts.

While working on the smallest debt, making minimum payments on the others. Stop using the credit cards entirely! Don't use gimmicks to avoid facing the reality of the debt. Close your accounts and commit to never borrowing money again. This is a huge physiological shift. I used credit cards all the time for decades, that is a thing of the past for us, we pay cash or don't buy it.

In your case, paying the 80% interest loan off is likely to be priority. I didn't even realize that was legal. Hopefully that is also the smallest balance.

Start making a monthly budget and sticking to it. Check out Dave's 'irregular income' budget form, it is meant for couples in your situation. The first steps will be to pay food, rent, utilities and transportation. After that, list your debts in priority order and pay them as your husbands income comes in during the month.

Don't despair, you two can get your financial life cleaned up! You just need a good plan and a lot of focus.

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    Regardless of my opinion on Ramsey's approach, I think in this case when there is such a high loan, it needs addressing first - not paying off the 80% debt will be a killer, I think, as it increases so quickly otherwise. – Joe Jan 6 '17 at 19:26
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    I agree with Joe's comment. Those super high interest debts are likely the priority. Sorry that you are in that situation. Believing that your situation can improve is the first step. It is possible :) – Matthew Fisher Jan 6 '17 at 19:29

Sounds like you are drowning in debt.

Why not just stop paying? It will ruin your credit, but eventually you might be able to settle for much less than you owe and a reasonable interest rate.

You will then have a long road to recover you credit, but IMHO this road is much longer and stressful.

Hey, you are paying a high interest rate because you are EXPECTED to default. If you were expected to pay back your rates would be lower!

  • If your credit is already terrible (as was mentioned), then it won't get much worse by not paying. The biggest risk is being sued. But, then, just go to court and say you don't have the money. The judge will ask you and the creditor to work out a payment plan. Even a judgement isn't terrible, as they are subject to usury laws. Declaring bankruptcy is a much, much worse option - many jobs require that a person has no current (up to 10 years) or never had one. – MikeP Jan 8 '17 at 1:34

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