Stay on Track or Defer?

Conventional wisdom in personal finance circles says one should pay off higher interest rate loans before tackling lower interest loans. I’ve shared that I’m on a mission to pay off my car note by the end of March 2011. In a separate post, I divulged my shortcoming of using a credit card and not paying the balance in full. Well, I decided to pay off the higher interest rate loan, my credit card. Although it use to carry a 6.99% interest rate, thanks to my credit card company’s ability to increase rates at their convenience, my interest rate is now 15.9%. Compared to my car loan interest rate of 7.88%, it’s easy to see that, over the long term, the credit card would be the more expensive loan. I went to bankrate.com, used their “credit card minimum payment calculator” and learned that it would take six years and eight months for me to pay off this balance of $775.69 (I’m happy that this information is also reflected on my credit card statement; we have the CARD Act to thank for these details :>). Keep in mind that this would NOT include any additional purchases (which, if past performance is any indication of my future actions- is completely NOT gonna happen). 

My credit card company calculates minimum payments at 2.45% of the balance at the end of of my billing cycle and in the 80 months that it would take for me to pay off my credit card bill (if I only paid the minimum amount due, which is $19), I would pay a total of $1,242.87. Where the heck did this amount come from? Well, it’s the money I used plus interest: $775.69 + $467.18 = $1,242.87. If I paid $27/month (and made no additional purchases) it would take approximately three years to pay off my balance, at the end of which I would pay a total of $982 ($775.69 balance + $213.31 interest).

Cartoon from www.mordantorange.com

Being a tad bit impulsive, I said to heck with the credit card debt and paid it off....with the funds I ordinarily use for my super-duper $1045/month car payment.  

Here’s my question to you: Should I make my super-duper car payment with funds from my savings account or should I make the regular payment only (and wait until next month to get back on track)?

A few notes: I would have at least $500 readily available in my savings account for an unexpected expense after moving $705 to my car payment to stay on track. Alternatively, if I make only the regular payment, I will postpone my payoff date to April 2011 (one month later). 


To be fair, the interest assessed on the credit card is for a smaller amount of money- $775.69- compared to the outstanding balance of $9,118.93 on the car note. Between now and the end of March, I will pay $251.34 in interest charges for the car loan. If I postpone the super-duper payment, between now and the end of my car loan I will pay $286.48 in interest charges (a difference of $35.14).