While my post on THE ULTIMATE CREDIT CARD REPAYMENT PROGRAM was well recieved, two very observant readers noted that the payoff order I used from The Automatic Millionaire was flawed.

The Automatic Millionaire advised to order your debts by balance divided by min payment, and in the fictional couple it meant for the most part that the lowest balance was paid off first.

Simon questioned this and I initially defended it, rationalizing that some cards would miss the snowball effect completely. The ordering method was also questioned by Nickel at FiveCentNickel.com.

The better approach recommended by simon and nickel is to pay off the debt with the highest interest rate first. This approach turns out to be better with the numbers.

The payoff when ordering by descending interest rates is 39 months instead of 36, but the interest paid is around $5577, a savings of just over $500. I stand corrected, while the snowball effect is still a sound approach to paying off debt, the ordering method in The Automatic Millionaire is not sound for ensuring the lowest interest payout, even if it does not minimize the payoff time.

This entry was posted on Monday, May 9th, 2005 and is filed under Credit Cards, Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.