Thursday, September 23, 2010

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, 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
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).

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