Kickin’ Credit Card Debt

February 29, 2008

Pursuit of Happiness: Money

I listen to financial advice talk shows from time to time. Two of my favorites are Dave Ramsey on the radio and Suze Orman on television.

If you’ve heard both of them, you might have noticed their ideas are different in a lot of ways. They especially differ on how to approach paying off credit card debt. When I was thinking about helpful ideas for getting rid of debt, I tried to imagine a conversation between the two of them.

Dave Here’s how you pay off your debts. List them in order from lowest balance to highest. Make minimum payments on everything, and then pay as much as you can extra on the lowest balance. When that one’s paid off tackle the next one up. Now you’re paying the minimum payment for the paid off loan, plus the minimum payment for the next loan, plus any other money you can manage.

Suze That’s ridiculous! You should pay off your credit cards by tackling the one with the highest interest rate first. Anyone who tells you any other way is wrong! Mathematically it just makes sense to pay off the high interest loans first.

Dave Ma’am, if we were doing math we wouldn’t have credit card debt. Personal finance is 20% math and 80% behavior. We need some incentive. Paying off the lowest balance first is the quickest way to feel the excitement of making progress. As you pay off bills, you have more and more available to pay on the next one on the list. It gets exciting!

Suze I want people to pay off their credit card debt, too. What I really like to see people do is transfer all their high interest balances to a lower interest card so they save money. Then they can have one low rate credit card to build up their FICO credit score.

Dave I don’t like to see people opening new credit card accounts. You don’t borrow your way out of a debt problem. I want people to focus on paying off their debts one buy one, and then chop up their credit cards and never go into debt again! If you play with snakes you’re gonna’ get bit.

Suze I knew you were crazy! You can’t just chop up your credit cards and close the accounts! Your FICO score will go down and you won’t be able to borrow money at good interest rates!

Dave When you learn to save up and pay cash, a FICO score doesn’t really matter. Get rid of those credit cards! No more debt!

Suze Where did you come from?!

The fun of this kind of imagined exchange is that two well-respected experts with very different points of view both say basically the same thing—credit card debt is harmful to building wealth long-term. Follow the advice of either one and you wind up at the same place.

Your credit card debt is paid off.

Then if you build up an emergency fund in a savings account, you’ll never feel like you need to use a credit card again.

Disclaimer: This is a fictitious representation meant to characterize different opinions on paying credit card debt. In truth, it can be hard to know what either of the people named is going to say at any given time!

Posted in Pursuit of Happiness: Money, Zine 5: February 2008