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CalendarBudget Blog

Personal finance matters as they pertain to saving money, living within your means and using CalendarBudget to solve your personal finance problems and to manage your money online.

Loan Consolidation and Debt Elimination

Loan Consolidation and Debt Elimination

If you have several debts such as Credit Card, Mortgage, Line of Credit and Personal Loan, chances are these each have a different interest rate. If possible, you can "pay off" the higher interest debts by adding more debt to the lower interest ones.

For example, if you have $5,000 debt on you credit card at 16% interest, and have a line of credit @ 7% interest with $9,000 (but has room for $20,000) it would be in your best interest to pay off the credit card debt by adding $5,000 to your line of credit.

If you have several debts such as Credit Card, Mortgage, Line of Credit and Personal Loan, chances are these each have a different interest rate. If possible, you can "pay off" the higher interest debts by adding more debt to the lower interest ones. For example, if you have $5,000 debt on you credit card at 16% interest, and have a line of credit @ 7% interest with $9,000 (but has room for $20,000) it would be in your best interest to pay off the credit card debt by adding $5,000 to your line of credit. Thus you'd eliminate the higher interest debt, and be left with the same total debt amount, but over all at a lower interest rate. This is good stuff! Interest will always get you over time, so any way to minimize it on your debts is a good thing.

If you cannot do this because you are maxed out on your low-interest debts or for whatever reason, you should do the following:

Its the big thing these days... this loan consolidation. In most ways it makes a lot of sense.

  • pay the minimum amount on all debts except for the highest interest one
  • pay as much as you can every payment on the highest interest debt
  • when that highest interest debt is paid off, take all the money you were paying towards it and pay it towards the next highest interest debt
  • follow this pattern until all debts are paid off

This process can be tracked with a simple manual debt elimination calendar or with more powerful tools like CalendarBudget

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Comments

Guest - Accelerating Mortgage Payments - good or bad? on Saturday, 11 August 2007 02:36

[...] However, there are some downsides to it.  Assuming interest rates dont change wildly, if you put your extra money into a tax-sheltered savings investment youll probably earn a better interest rate on your investment that the interest rate you are paying for your mortgage.  Also, if you have any other debts (credit cards, loans, etc) they are probably at a higher interest rate than your mortgage.  You should ALWAYS pay off the higher interest debt first.  Even though the mortgage is likely a much higher amount, its the interest rate that should determine which order you pay things off [see previous blog on debt elimination calendar]. [...]

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[...] However, there are some downsides to it.  Assuming interest rates dont change wildly, if you put your extra money into a tax-sheltered savings investment youll probably earn a better interest rate on your investment that the interest rate you are paying for your mortgage.  Also, if you have any other debts (credit cards, loans, etc) they are probably at a higher interest rate than your mortgage.  You should ALWAYS pay off the higher interest debt first.  Even though the mortgage is likely a much higher amount, its the interest rate that should determine which order you pay things off [see previous blog on debt elimination calendar]. [...]
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