Over the span on 10 years (as an example), the interest paid on the $350,000 would be 31% of the original loan; interest paid on the $100,000 would be almost 38%; with a combined interest of near-33%.

However, in dollar terms, on the 6.75% loan, you would be paying almost three times the amount of interest than on the lower rate loan.

The question from Jean, if you want to increase your credit score, I believe paying down the debts on the cards with the highest balance would benefit you more. One of the key credit scores looks at ‘how much debt versus how much debt you can have on a card’. If you are over the 30% mark on one credit card, it will eventually lower your score. Meaning, if you have a credit card with a limit of $10,000, you can charge up to $3,000 on the card before it starts to negatively affect your score. This was an issue we had to deal with and saw an improvement to our scores once we paid down our debt.

I think the three options you are offering are brilliant. If you were my financial coach I would find your approach very helpful. These 3 choices allow the indebted person to find what resonates most with them and what suits their personality. I would choose the option of debt consolidation. I am the type of guy who is committed to pay off and stay out of debt.

Thanks,

Jean

The correct thing to do is step number one. Anything else is irrational and is exactly why we are in a financial mess to begin with!

Therefore there are sometimes benefits within your debt situation to also be considered. We will throw 1500 at the other student loan to knock its interest rate down before eliminating PMI on the mortgage.

That’s actually very interesting and true – once you’re able to pay off a debt fast it does motivate you more. And even more so when you know your credit score got a big boost from it. Last December my credit score was only at 680 and now it’s at 765 after I got it checked for an auto loan. :)

I like the messy house analogy.

And therein is the key: motivatation. For those who have issues with debt, I believe paying the smaller debts can be more motivating.

Love this topic.

Cheers,

RB

Rich By 30 Retire By 40

Interesting article.

One comment for people looking at the consolidation option would be to take a ooan option vs the Line of credit. The main reason for this is to have a set structured monthly payment with an end date in site. Thats a motivation piece. Most lender wont Amm more than 36 months on a consolidation but if you can stretch to 48 or 60 months thats an option to keep the required payment down. One trick I do for clients is setup a loan payment that fits their budget and keeps their ability to spend in check but give them a payment amount that will pay off their loan faster. They can speed up their payment schedule as much as possible but still have the required payment there in case they fall off the wagon and will still be debt free in XX months. I, depending on the client, will require closure of credit facilities I am re-writing and leave minimal cash flow credit available to minimize racking up more debt.

Consolidation lines of credit are a credit card with a better rate. You put money on em and take more out.

Just my $.02

Going with what FT said – if you consolidate your credit cards – it may lower your credit score but if you’re responsible your credit score will rebound pretty fast. Especially with a lower interest you can pay more of the principal off. But if you just pay the minimum there is a flag on your credit score that says you’re just paying the minimum. If you know you have to consolidate you should – which will be good for you, but if you consolidate over and over again that’s not a good sign.