What should I pay first?

bigadaj

Anthorn wrote: »

I don't understand. Your monthly payment presumably comes from income and therefore it's the monthly payment that matters and not the APR.

My position is this: If you have two cards and you pay off one card then you are paying interest on only one card. But if you make a payment against the higher interest card and don't clear it you are still paying interest on two cards. Pretty obvious really.

Pretty obviously wrong, it's up to you if you want to follow poor advice but dont inflict it on others.

The simple way of looking at it is that you have a certain amount of debt one month, and potentially sum of money to make a partial payment. After making that payment you don't gave that any more but you have less debt and are accruing ,ess interest. Making this payment against the higher interest debt means that less interest will accrue, so you are better off than paying off a lower interest card.

Pretty obvious really.

YorkshireBoy

Anthorn wrote: »

I don't understand. Your monthly payment presumably comes from income and therefore it's the monthly payment that matters and not the APR.

My position is this: If you have two cards and you pay off one card then you are paying interest on only one card. But if you make a payment against the higher interest card and don't clear it you are still paying interest on two cards. Pretty obvious really.

Ye Gods!...

Ben8282

Normally the advice would be to pay as much as possible to the card with the highest APR.
However, Anthorn has made a valid point. If the OP is using the cards to make purchases, if the balance of one card could be cleared completely then that card could be used for purchases and paid off every month thereby saving the OP interest on their purchases.

windup

you wont be paying interest on purchases on the cheaper card if you clear it every month, instead you will be paying the higher interest on the card who's balance you haven't cleared or reduced, so effectively you've just transferred a cheap debt to an expensive one.

for effect imagine

card 1 has a balance of £100 and an apr of 1%
card 2 has a balance of £101 and an apr of 1200%

and you have £100 spare.

you can either pay off card 1 totally and save £1 per year
or
pay £100 off card 2 and save £1200 per year

Ben8282

It would depend on the difference in interest rates between the 2 cards and the amount of the purchases.

windup

on average you might get (a rolling) 3 weeks of interest free purchases, people tend to get paid monthly and pay their bills monthly, and don't necessarily do something rational and timely with that £300 they might have freed up by buying the groceries on a credit card, it will probably just be sat there in the current account waiting to pay off the bill in full at the payment date

bigadaj

windup wrote: »

you wont be paying interest on purchases on the cheaper card if you clear it every month, instead you will be paying the higher interest on the card who's balance you haven't cleared or reduced, so effectively you've just transferred a cheap debt to an expensive one.

for effect imagine

card 1 has a balance of £100 and an apr of 1%
card 2 has a balance of £101 and an apr of 1200%

and you have £100 spare.

you can either pay off card 1 totally and save £1 per year
or
pay £100 off card 2 and save £1200 per year

It's sometimes interesting to quite an extreme example, but it has to be credible in the real world.

Quoting an example she there is

Card 1 with a balance of £300 with an Apr of 5%
Card 2 with a balance of £3000 with an Apr of 30%

Now what would you do with your spare £300.

Also whilst the money may be sat in a current account for a month then assuming it's one paying a decent rate, far in excess of any available savings account, then that could easily be paying at or close to the interest on the lower rate card.

[Deleted User]

bigadaj wrote: »

It's sometimes interesting to quite an extreme example, but it has to be credible in the real world.

Quoting an example she there is

Card 1 with a balance of £300 with an Apr of 5%
Card 2 with a balance of £3000 with an Apr of 30%

Now what would you do with your spare £300.

Let's see, shall we?

Lets assume you're currently paying £10pm on the first card, and £100pm on the second.

Paying off card 1 now, will save you £19 in interest.

Paying the £300 off card 2, will save you £711 in interest, and reduce your repayment period by 10 months.

redpete

Anthorn wrote: »

I don't understand. Your monthly payment presumably comes from income and therefore it's the monthly payment that matters and not the APR.

In the OP's case they have an extra amount of cash to pay off more than the minimum amount, so keeping the monthly outgoing as low as possible is not a priority.

My position is this: If you have two cards and you pay off one card then you are paying interest on only one card. But if you make a payment against the higher interest card and don't clear it you are still paying interest on two cards. Pretty obvious really.

Well I gave you a thanks because your wrong-headed logic gives others the opportunity to point out the error so that others might not be equally confused.

One way your scheme could make sense is if you are really up against it and have to keep monthly cash-flow as low as possible and the minimum monthly payment on two cards is higher than the minimum monthly payment on the same total amount but on one card. Another is if one of the cards is close to the end of a low interest period and it will shortly be rising to a much higher level - in this case it could be worth paying off the card with the soon-to-be disappearing low interest rate.

In the more normal case when people are interested in paying the least amount of interest in total over the life of the debt then your scheme makes no sense.

redpete

Ben8282 wrote: »

Normally the advice would be to pay as much as possible to the card with the highest APR.
However, Anthorn has made a valid point. If the OP is using the cards to make purchases, if the balance of one card could be cleared completely then that card could be used for purchases and paid off every month thereby saving the OP interest on their purchases.

Let's say this 'purchase' card has £500 spend a month and is cleared every month, so 0% interest instead of its normal 11% interest rate so you are saving £500 x 11% / 12 interest each month. If however you used that £500 to pay of the other card that is costing you 30% then you save £500 x 30% /12 a month.

If we take into account the minimum payment requirement then paying off the purchase card would save about £4.50 a month and paying off the higher-rate card would save about £12.10 a month. I know which I would choose.