By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension
It’s three weeks since Christmas and credit card bills with holiday expenses (gifts, travel, etc.) are starting to arrive. When there isn’t enough cash available to pay them in full but more than the required minimum payments, questions like this arise: Should service members pay more than the minimum on credit cards with the smallest balance or on those carrying the highest interest rates? The answer is “it depends.”
Some experts believe it is cost-efficient to pay off debts with the highest interest rates, while others believe it is emotionally satisfying and motivating to pay off those with the smallest balance. Regardless of which decision is made, start clients off by making a list of all of their creditors and debts (e.g., Sears credit card). Next write down the corresponding balance, APR (interest rate), and minimum monthly payment for each debt.
Next, it’s time for Power Pay. Developed by Utah State University Cooperative Extension, PowerPay assumes that users are paying at least the required minimum payment to each of their creditors and can continue to pay the same total monthly amount until all of existing debt balances are down to zero. The program also assumes that no new debts will be added during the duration of the debt repayment plan. If they are, they will not be included in the debt repayment calculation.
To use PowerPay, log in with a user name and password and enter the following information:
- Names of creditors
- Outstanding balance for each debt
- Annual percentage rate (APR) on each debt
- Monthly payment for each debt
Once this information is entered, PowerPay users can print out a calendar that shows how much to pay each creditor monthly. When a debt gets paid off, its previous monthly payment is added to the payment sent to a remaining creditor. The analysis shows when each debt will end and the time and interest saved by following the PowerPay program.
Generally, users save the most debt repayment time and interest with PowerPay by adding extra payment amounts to debts with the highest APRs. This might include credit cards with high penalty interest rates and high-interest rate department store credit cards which often have interest rates in the 21% to 28% range.
For further assistance with debt repayment, military families can contact a non-profit credit counseling agency. Most credit counseling is done by telephone and secure Web sites so driving distance to an agency need not be a problem. Counseling agencies can assist clients with budgeting and enroll them in a debt management plan (DMP) where one monthly payment is made to the agency and proportionately distributed among a client’s creditors. With some DMPs, creditors may be willing to accept lower payments and/or reduce interest rates and fees charged. To find a local credit counseling agency, visit http://www.nfcc.org/FirstStep/firststep_01.cfm.
This post was published on the Military Families Learning Network blog on January 12, 2015.