Hey All!
Posting this on behalf of a close friend. He does not have a Reddit but I felt like it was necessary to bring the conversation here.
Context: He’s in heavy debt and the monthly payments are too much to the point where it’s crippling. He has just come across a $20K post tax lump sum and we’ve been going back and forth on best path forward. He has 6 credit cards, 1 personal loan and 1 car loan. For the sake of this convo, he only wanted to tackle the credit cards because of the interest rates (Listed Below). He’s also only able to afford to pay the minimum payments. He’d be able to net $1K a month before any other bills such as subscriptions and phone bills (he doesn’t pay rent).
I am someone who believes in paying debt off completely but he firmly believes he should keep atleast $5K for emergency funds. I am not against that notion completely and recommended paying off all credit cards but one (Amex – 9.99% – Listed Below)
We’re looking for some fresh unbiased outside voices who can help steer us to the best path forward.
All Debt Info:
Chase Card 1:
Debt: $5.3K
Payment: $200
Interest Rate: 27.74%
Chase Card 2
Debt: $6.1K
Payment: $200
Interest Rate: 27.74%
Amex:
Debt: $6.4K
Payment: $177
Interest Rate: 9.99%
Capital One:
Debt: $1.5K
Payment: $500
Interest Rate: 23.74%
Citi:
Debt: $2.7K
Payment: $150
Interest Rate: 29.99%
Apple:
Debt: $560.24
Payment: $100
Interest Rate: 25.74%
Total Debt: $22,812.56
Total Monthly Minimum: $1,327
Interest Rate Average: 24.16%
For what it’s worth, here’s the personal loan info
Remaining Balance: $12.2K
Monthly Payment: $361.19
Interest Rate: 15.5%
Heated Debate: Heavy Debt, Lump Sum
byu/BootyJuiceJr inpersonalfinance
Posted by BootyJuiceJr
10 Comments
The debt at those interest rates *is an emergency*.
So I would deplete my emergency fund to pay them off.
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Sounds like you are asking about a framework for what to do with money.
Start with reviewing the Prime Directive in the PF Wiki. It will answer your question and many other questions you didn’t realize you should be asking.
* https://www.reddit.com//r/personalfinance/wiki/commontopics
As long as he puts all of most of it toward the debt and changes his habits, he’s doing well.
Personally, CC debt IS an emergency. Highest APR first I’d throw every cent minus $1k, then turn around and cash flow the emergency fund up afterward and pay as little interest as possible. And never go into debt again.
It’s a math problem: Pay off everything but the amex and personal loan. Put the remaining to an emergency fund, FOR EMERGENCIES. Then the extra $1150/months he can have the amex paid off in 6ish months or the personal loan paid off in a year.
I’d side with your friend on keeping the $5K emergency fund. Using the entire $20K to pay down debt sounds good on paper, but leaving yourself with no cash reserves is a great way to end up right back in credit card debt when something unexpected happens.
I’d put $15K toward the credit cards, prioritizing the highest interest rates while also eliminating as many monthly payments as possible.
Here’s how I’d allocate it:
– Citi: $2,700 (paid off)
– Chase 1: $5,300 (paid off)
– Apple: $560.24 (paid off)
– Capital One: $1,500 (paid off)
– Chase 2: $4,939.76 (remaining balance $1,160.24)
That eliminates four cards entirely, substantially reduces a fifth, and frees up $950 in reported monthly payments, assuming those are actual minimums.
I’d then take that freed-up cash flow and aggressively pay off the remaining Chase balance. After that, I’d tackle the personal loan at 15.5% before the Amex at 9.99%. There’s no reason to prioritize the Amex simply because it’s a credit card when the personal loan carries a higher interest rate.
One thing worth clarifying: Are those really the minimum payments? A $500 minimum on a $1,500 Capital One balance seems unusually high.
Also, the listed credit card balances add up to $22,560.24, not $22,812.56.
The bigger issue is making sure he doesn’t accumulate new balances. If his spending habits don’t change, the $20K will only provide temporary relief.
Ultimately, I think the best approach is to improve cash flow, preserve a reasonable emergency fund, and use the additional monthly breathing room to eliminate the remaining debt. Being debt-free is the goal, but having absolutely no liquidity along the way isn’t necessarily the smartest way to get there.
I’ve paid off $20k in debts and racked those credit cards back up within a year. Just as important as paying off the debt is budgeting and changing the habits that led to the debt. Once paid off, close the credit card account.
You are absolutely on the right track with your suggestion. If you want the mathematically best option, pay them all down to 0 in order of highest interest rate down to lowest.
If it were me I would pay off all the credit cards except for the Amex at 9.99% interest. That would be $16,412 spent. Then I would put another $2K onto the personal loan.
Then you have ~$1500 left as a good starter emergency fund which you will be able to build much faster now.
The old monthly payment with the personal loan included was $1688. It will now be only $177 Amex + $361 personal loan ($538 total). So you are saving $1150 in payments a month. I would split that in $650 extra principal payment towards the personal loan, and save $500 into emergency savings until you have 3-6 months of emergency.
With all of this call credit card companies and get payoff amounts, ensure there are no early payoff penalties, and that the payoffs go as smooth as possible.
Great news that your friend will be making an almost overnight move to a much more financially stable situation!
I mean I’m not against him keeping a small amount for a mini EF. 5K isn’t terrible. I would probably do a little less than that while aggressively paying off this debt. But. If they don’t have one. Keeping a little isn’t a bad idea. And it depends on what your risks are. If you have a lot of high risk situations like a large family and a career that could implode. Then sure. Having a higher EF is safer. But having something makes sense so you don’t need to pay with credit cards.
I mean this isn’t that complicated of a situation. There’s a ton of different ways you can do it. The amount you got pays off the most of it. If I woke up in this person shoes. I’m paying off in this order, 1.5K Capital one, Apple $560.24, 5.3K Chase, 6.1k chase, and turning that 5K into a ~3.9K EF. And paying off the 2.7K CITI loan off. Then I’m cutting up those cards. And closing those accounts. I will never use them again under any circumstances. Now the order doesn’t actually matter.
There might be a more efficient pay off cycle and I’m not going to argue with anybody who comes up with that. But. This saves you ~1150 per month. If I really want that 5K EF. Then the next month I’m paying my minimums. And I’m now back at 5K EF. More or less. So… I dipped in a little more than he wanted. But the result… is your really down to only 2 creditors. And that’s a great place to be. I think it’s worth a ~1-2 month increase in risk.
The following months though I’m putting ~1150/mo on the remaining debt.
Use all of it toward the highest interest rates and i dont think theres another good choice. After that you still have a lot of debt (14Kish)
Start with the highest interest and pay off as much as possible. Move the previous payments for those debts to the next highest interest card/loan remaining. The last thing to pay off is the AmEx.
I was in agreement with keeping the change as cash after paying off all but the 10% Amex… until you tossed in the 15.5% personal loan.
To an extent, having savings while you have debt, is no different than borrowing your savings at whatever your worst interest rate(s) on that much debt is. I could see an argument for paying 10%, when you can earn 4% of it back in an HYSA, to keep some cash liquid. I have a hard time making that argument for almost 16%.
I’d empty it all at the debt, and cross the “what if” bridge if something happens, rather than paying >10% in case it does happen.