A lot of time, money and energy go into figuring out why people make the wrong choices when paying off debts.
For example, when faced with multiple debts with varying interest rates, people tackle the debt using one of two strategies: paying the smallest debt off first (known as the infamous “snowball strategy“), or paying off the debts with the higher interest rates first (the more logical approach, which, if followed, gets you out of debt faster).
I’m ashamed to say that, for quite a number of years, if not decades, I was a snowballer.
I wasn’t always a personal finance editor, but I was educated enough to realize that higher interest debt is more expensive. But that didn’t stop me from doggedly pursuing the thrill of paying off as many small debts as I could first — no matter their interest rates — before I tackled any bigger ones.
The snowball method isn’t new, but giving it a name was genius. It combines instant gratification with achievement, and it appeals to the emotional side of debt rather than the rational.
But after writing and editing about the right and wrong ways to pay multiple debts — and after incurring some debt over several credit cards when I moved last winter — I thought it high time I paid off debt the smart way.
Let it be known that I’ve not been an ostrich when paying attention to the interest rates on my cards. I know what they are, but that still didn’t stop me from tackling the biggest debt last. But when actually writing down the balances of several cards and their corresponding APRs, I was a little shocked.
Case in point: Some of my largest purchases when I moved were a new refrigerator and a new washer/dryer. My washer was headed toward collapse after 20 years of use (when Maytag was actually manufactured by Maytag, not Whirlpool), my dryer didn’t dry and my refrigerator was going to die at the least opportune time (like right after a big grocery haul). I scoured the ads and ended up at an appliance sale at Lowe’s. Having always been a Home Depot customer, I didn’t have a Lowe’s credit card, so I opened one (yes, for the first-time discount).
The interest-free period for the card was 12 months, and I almost have the balance paid off already, but then the APR jumps to 24.99 percent! Might as well round that up to 25 percent. Geez. That’s the highest APR card in my wallet. So that balance is going first. And I don’t think I’ll be using the Lowe’s credit card for anything else.
Next, the Home Depot card. While not much better, the APR on that card is around 22 percent or 23 percent. Luckily, I paid what little I had charged on that card off this month.
So, I am left with my piddly-APR general use reward cards, whose rates are so much more reasonable than any retail card out there. Why I still use retail cards … well, I know why. It’s the incentives, like the frequent-use coupons, the first-time use discounts, the “no-interest” for 12 months teasers, etc.
But now that I’m applying a sense of economics to my debt paying strategy rather than paying by emotion, I’ll never fall prey to those come-ons again.
Of course, that’s not true, but then if we all approached our debts like economists, the card issuers would never make any money. You know they are banking on us to fall for the bells and whistles — until the bills come in. But I’m glad I’m finally practicing what I’m preaching.