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I have 3 credit cards which I am slowly paying them off.

Card#   Balance    Monthly  Interest   Months to pay of   Minimum 
                   Payment             at current rate    Payment
1       $15,904    $453       2%            35            $453 
2       $11,555    $652       2%            18            $360 
3       $8,704     $260       0%            24            $260

Facts:

  • The interest rates are locked in and cannot change, so at least I don't have to worry about that.
  • The monthly payments that I am sending in is the most I can pay.
  • Other than redirecting money going to card #2, there isn't a whole lot of space to play with, as cards #1 and #3 are receving the minimum payment.

How do I calculate the most optimal way to pay off all cards in a shortest time?

Chris W. Rea
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NeedAdvice
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2 Answers2

12

The optimal way to pay off all cards in the least amount of time is a waterfall approach, with the most money going to the account with the highest interest rate, or in the event of a tie, the lowest balance. Then when that account is paid off, go to the next one. There's a bit of wiggle room if one is tax deductible, but in this case, there shouldn't be.

So, what you should do is pay off card 2, then 1, then 3, using the waterfall scheme. You have correctly identified that card 2 will be paid off in 18 months. Figure out what the balance will be on Card 1 at that time, and how long the new payment of $1105 will take to get it paid off. Then figure out how long it'll take to pay off card 3 with $1365.

Without crunching the numbers myself, I'm guessing you'll be debt free in about 26 months or so, that card 3 will be paid off before you are done with Card 1. So what you'd do in that case is pay off card 1 using the combined total payment.

PearsonArtPhoto
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I could be mistaken, but since card #1 and card #2 have the same interest rate, it doesn't matter which one you pay more towards, both in terms of time it will take you to pay it down and how much interest you pay. Basically you'll be paying $1105 each month towards a total debt of $27,459 at 2%, irrespective of how you divide the payments up over the cards (just make sure you observe minimum payment requirements).

The situation would be different if they had different interest rates or if the low rate on one of them would expire quicker than on the other one.

Korneel Bouman
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