The Ultimate Credit Card Payment Program

By Mike Hillyer | Related entries in Banking, Credit Cards, Debt Management, Financial Management, Financial Planning

Update: While the principles presented in this post are sound, the payoff order described it slightly flawed. Please read my followup post/mea culpa before applying the principles here.

Get out your pen and paper, because I am about to share with you the ULTIMATE CREDIT CARD REPAYMENT PROGRAM! That’s right, the ULTIMATE CREDIT CARD REPAYMENT PROGRAM!!

See, now I have your attention. What I’m going to share is not new or earth-shaking. I heard it years ago, and actually first picked up the concept from a copy of Quicken. I have since picked it up from a variety of sources under a large number of different names. Rather than try and remember one, I’m just going to call it the ULTIMATE CREDIT CARD REPAYMENT PROGRAM!.

Still paying attention? Ok, I want to start with some background reading. Regular readers will remember my previous article on how paying just the minimum monthly payment every month is a bad idea and how taking this month’s minimum monthly payment and paying it for the rest of the loan instead of the minimum on future statements can shave years off of your debt repayment and save you a lot of money in interest payments.

This time around I want to introduce you to the rest of the equation. Lets take an example household; the husband and wife each have two credit cards, and they purchased a car with a bank loan. Their debt is as follows:

Visa One: $5000 at 18.30% interest, $150 minimum
Visa Two: $1200 at 11.50% interest, $50 minimum
Mastercard One: $3000 at 17.99% interest, $65 minimum
Mastercard Two: $2500 at 18% interest, $50 minumum
Car Loan: $18,500 at 7% interest, $575 minimum

So first let’s assume that our happy couple read my last article, and will be paying the minimums listed above for the rest of the life of their debts (and never spend on the cards again):

normal paydown

Here’s the table version, scroll past to get back to the interesting stuff:

Visa

Loan

Visa2

MC2

$1,217.12

$18,516.00

$4,842.56

$3,047.80

$2,299.01

$1,178.78

$18,049.01

$4,766.81

$3,028.49

$2,283.50

$1,140.08

$17,579.30

$4,689.90

$3,008.89

$2,267.75

$1,101.01

$17,106.84

$4,611.82

$2,989.00

$2,251.76

$1,061.56

$16,631.63

$4,532.53

$2,968.81

$2,235.54

$1,021.73

$16,153.65

$4,452.03

$2,948.32

$2,219.07

$981.52

$15,672.88

$4,370.29

$2,927.52

$2,202.36

$940.93

$15,189.30

$4,287.30

$2,906.41

$2,185.39

$899.95

$14,702.91

$4,203.04

$2,884.98

$2,168.18

$858.57

$14,213.68

$4,117.49

$2,863.23

$2,150.70

$816.80

$13,721.59

$4,030.62

$2,841.16

$2,132.96

$774.63

$13,226.63

$3,942.43

$2,818.75

$2,114.95

$732.05

$12,728.79

$3,852.88

$2,796.01

$2,096.68

$689.07

$12,228.04

$3,761.96

$2,772.92

$2,078.13

$645.67

$11,724.37

$3,669.64

$2,749.49

$2,059.30

$601.86

$11,217.76

$3,575.91

$2,725.71

$2,040.19

$557.62

$10,708.20

$3,480.74

$2,701.58

$2,020.79

$512.97

$10,195.66

$3,384.11

$2,677.08

$2,001.10

$467.88

$9,680.14

$3,286.00

$2,652.21

$1,981.12

$422.37

$9,161.60

$3,186.38

$2,626.97

$1,960.84

$376.42

$8,640.05

$3,085.24

$2,601.36

$1,940.25

$330.02

$8,115.45

$2,982.55

$2,575.35

$1,919.35

$283.19

$7,587.79

$2,878.28

$2,548.96

$1,898.14

$235.90

$7,057.05

$2,772.41

$2,522.18

$1,876.62

$188.16

$6,523.22

$2,664.92

$2,494.99

$1,854.77

$139.96

$5,986.27

$2,555.79

$2,467.39

$1,832.59

$91.30

$5,446.19

$2,444.98

$2,439.38

$1,810.08

$42.18

$4,902.96

$2,332.47

$2,410.95

$1,787.23

$0.00

$4,356.56

$2,218.23

$2,382.10

$1,764.04

$3,806.97

$2,102.24

$2,352.81

$1,740.50

$3,254.18

$1,984.48

$2,323.08

$1,716.60

$2,698.16

$1,864.91

$2,292.91

$1,692.35

$2,138.90

$1,743.50

$2,262.28

$1,667.74

$1,576.38

$1,620.23

$2,231.20

$1,642.75

$1,010.57

$1,495.08

$2,199.65

$1,617.39

$441.47

$1,368.00

$2,167.62

$1,591.66

$0.00

$1,238.98

$2,135.12

$1,565.53

$1,107.98

$2,102.13

$1,539.01

$974.97

$2,068.64

$1,512.10

$839.91

$2,034.66

$1,484.78

$702.79

$2,000.16

$1,457.05

$563.57

$1,965.14

$1,428.91

$422.21

$1,929.61

$1,400.34

$278.69

$1,893.53

$1,371.35

$132.96

$1,856.92

$1,341.92

$0.00

$1,819.76

$1,312.05

$1,782.04

$1,281.73

$1,743.76

$1,250.95

$1,704.90

$1,219.72

$1,665.46

$1,188.01

$1,625.42

$1,155.83

$1,584.79

$1,123.17

$1,543.55

$1,090.02

$1,501.69

$1,056.37

$1,459.20

$1,022.21

$1,416.08

$987.55

$1,372.31

$952.36

$1,327.88

$916.64

$1,282.79

$880.39

$1,237.02

$843.60

$1,190.57

$806.25

$1,143.41

$768.35

$1,095.56

$729.87

$1,046.98

$690.82

$997.68

$651.18

$947.63

$610.95

$896.84

$570.12

$845.29

$528.67

$792.96

$486.60

$739.85

$443.90

$685.94

$400.55

$631.22

$356.56

$575.68

$311.91

$519.31

$266.59

$462.10

$220.59

$404.03

$173.90

$345.08

$126.51

$285.26

$78.40

$224.53

$29.58

$162.90

$0.00

$100.34

$36.85

$0.00

A grand total of 83 months to pay down their debt, or nearly seven years. In the process they accrue around $8500 in interest.

Our happy couple is already way better off than if they had just made the monthly minimum payment on the credit card statements each month, in that case they would have ended up taking 401 months (33 years) to pay off their last debt, at a total cost of $22068 in interest! Good thinking so far, they have saved 318 months and $13,500 in interest.

Now comes the magic of ULTIMATE CREDIT CARD REPAYMENT PROGRAM!; if you read The Automatic Millionaire, you will find that the author recommends dividing the balance by the minimum payment on a debt to determine which debts to pay off first (the lowest number gets paid off first, then the second, etc etc.) That is a good start, as your debts get paid off as fast as possible, but there was something missing. Something I will call the waterfall effect (mainly because it has been called that by others before me, but then they never called their program the ULTIMATE CREDIT CARD REPAYMENT PROGRAM!).

The waterfall effect is simply this: when you pay off your first credit card, do not take the monthly payment money in future months and buy chinese food, instead take the paid off card’s monthly payment and apply it to the next card. Here’s the graph using the waterfall effect:

waterfall paydown

Wow, big difference! Here’s the payment table (once again scroll if you have ADD):

Visa

Loan

Visa2

MC2

$1,217.12

$18,516.00

$4,842.56

$3,047.80

$2,299.01

$1,178.78

$18,049.01

$4,766.81

$3,028.49

$2,283.50

$1,140.08

$17,579.30

$4,689.90

$3,008.89

$2,267.75

$1,101.01

$17,106.84

$4,611.82

$2,989.00

$2,251.76

$1,061.56

$16,631.63

$4,532.53

$2,968.81

$2,235.54

$1,021.73

$16,153.65

$4,452.03

$2,948.32

$2,219.07

$981.52

$15,672.88

$4,370.29

$2,927.52

$2,202.36

$940.93

$15,189.30

$4,287.30

$2,906.41

$2,185.39

$899.95

$14,702.91

$4,203.04

$2,884.98

$2,168.18

$858.57

$14,213.68

$4,117.49

$2,863.23

$2,150.70

$816.80

$13,721.59

$4,030.62

$2,841.16

$2,132.96

$774.63

$13,226.63

$3,942.43

$2,818.75

$2,114.95

$732.05

$12,728.79

$3,852.88

$2,796.01

$2,096.68

$689.07

$12,228.04

$3,761.96

$2,772.92

$2,078.13

$645.67

$11,724.37

$3,669.64

$2,749.49

$2,059.30

$601.86

$11,217.76

$3,575.91

$2,725.71

$2,040.19

$557.62

$10,708.20

$3,480.74

$2,701.58

$2,020.79

$512.97

$10,195.66

$3,384.11

$2,677.08

$2,001.10

$467.88

$9,680.14

$3,286.00

$2,652.21

$1,981.12

$422.37

$9,161.60

$3,186.38

$2,626.97

$1,960.84

$376.42

$8,640.05

$3,085.24

$2,601.36

$1,940.25

$330.02

$8,115.45

$2,982.55

$2,575.35

$1,919.35

$283.19

$7,587.79

$2,878.28

$2,548.96

$1,898.14

$235.90

$7,057.05

$2,772.41

$2,522.18

$1,876.62

$188.16

$6,523.22

$2,664.92

$2,494.99

$1,854.77

$139.96

$5,986.27

$2,555.79

$2,467.39

$1,832.59

$91.30

$5,446.19

$2,444.98

$2,439.38

$1,810.08

$42.18

$4,902.96

$2,332.47

$2,410.95

$1,787.23

$0.00

$4,306.56

$2,218.23

$2,382.10

$1,764.04

$3,706.68

$2,102.24

$2,352.81

$1,740.50

$3,103.30

$1,984.48

$2,323.08

$1,716.60

$2,496.40

$1,864.91

$2,292.91

$1,692.35

$1,885.97

$1,743.50

$2,262.28

$1,667.74

$1,271.97

$1,620.23

$2,231.20

$1,642.75

$654.39

$1,495.08

$2,199.65

$1,617.39

$33.20

$1,368.00

$2,167.62

$1,591.66

$0.00

$613.98

$2,135.12

$1,565.53

$0.00

$1,327.13

$1,539.01

$507.02

$1,512.10

$0.00

$644.78

$0.00

By just keeping the debt payment money going to debt payment by redirecting it to the next debt when the previous debt is paid off, we sliced our repayment time by 42 months (or 3.5 years), and only paid $6900 in interest, saving $1600! The waterfall effect gets stronger and stronger as more and more debts get repaid, because by the time you pay off four of the debts, the monthly payments of all five debts are brought to bear on the fifth (and final) debt! Can you afford to do that? Of course you can! Remember, you are not paying any more than you are at month one, you are just aggregating the total amount you make in monthly payments as you go rather than letting it shrink as individual debts are repaid.

As an added kicker, let’s assume our happy couple took my advice in my previous article and also found some extra cash to help the process along. They found an extra $100 in their budget and put it toward their first debt. This extra $100 will accelerate the payment of the first debt and then roll its way along, adding to the waterfall effect:

accelerated waterfall

As Emeril would say, BAM! Look what an extra $100 a month did:

Visa

Loan

Visa2

MC2

$1,217.12

$18,516.00

$4,842.56

$3,047.80

$2,299.01

$1,078.78

$18,049.01

$4,766.81

$3,028.49

$2,283.50

$939.12

$17,579.30

$4,689.90

$3,008.89

$2,267.75

$798.12

$17,106.84

$4,611.82

$2,989.00

$2,251.76

$655.77

$16,631.63

$4,532.53

$2,968.81

$2,235.54

$512.06

$16,153.65

$4,452.03

$2,948.32

$2,219.07

$366.96

$15,672.88

$4,370.29

$2,927.52

$2,202.36

$220.48

$15,189.30

$4,287.30

$2,906.41

$2,185.39

$72.59

$14,702.91

$4,203.04

$2,884.98

$2,168.18

$0.00

$14,063.68

$4,117.49

$2,863.23

$2,150.70

$13,420.71

$4,030.62

$2,841.16

$2,132.96

$12,774.00

$3,942.43

$2,818.75

$2,114.95

$12,123.52

$3,852.88

$2,796.01

$2,096.68

$11,469.24

$3,761.96

$2,772.92

$2,078.13

$10,811.14

$3,669.64

$2,749.49

$2,059.30

$10,149.21

$3,575.91

$2,725.71

$2,040.19

$9,483.41

$3,480.74

$2,701.58

$2,020.79

$8,813.73

$3,384.11

$2,677.08

$2,001.10

$8,140.14

$3,286.00

$2,652.21

$1,981.12

$7,462.63

$3,186.38

$2,626.97

$1,960.84

$6,781.16

$3,085.24

$2,601.36

$1,940.25

$6,095.72

$2,982.55

$2,575.35

$1,919.35

$5,406.27

$2,878.28

$2,548.96

$1,898.14

$4,712.81

$2,772.41

$2,522.18

$1,876.62

$4,015.30

$2,664.92

$2,494.99

$1,854.77

$3,313.72

$2,555.79

$2,467.39

$1,832.59

$2,608.05

$2,444.98

$2,439.38

$1,810.08

$1,898.27

$2,332.47

$2,410.95

$1,787.23

$1,184.34

$2,218.23

$2,382.10

$1,764.04

$466.25

$2,102.24

$2,352.81

$1,740.50

$0.00

$1,259.48

$2,323.08

$1,716.60

$403.79

$2,292.91

$1,692.35

$0.00

$1,387.28

$1,667.74

$468.08

$1,642.75

$0.00

$677.39

$0.00

We are paid off in 36 months, and have incurred around $6050 in interest. That means by adding $100 we shave off 6 months and $850 in interest compared the the waterfall effect by itself. I’ll leave it to you to determine the savings if our happy couple could find even more money to accelerate the waterfall effect.

Folks, there really is no easier way to get your credit cards paid off fast than the ULTIMATE CREDIT CARD REPAYMENT PROGRAM!. The principle is simple and effective:

1) Order your debts by dividing the balance of the debt by the minimum monthly payment.
2) Make the minimum monthly payment on all debts, but ignore future statements and avoid paying the lower minimums in future months.
3) Pay extra towards the first payment in the repayment order.
4) When a debt is paid off, move its monthly payment plus the extra money to the next debt in order.

By continuing this process you save years of repayments and thousands of dollars!

So there you have it, don’t say I never showed you anything cool.

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This entry was posted on Thursday, May 5th, 2005 and is filed under Banking, Credit Cards, Debt Management, Financial Management, Financial Planning. 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.

28 Responses to “The Ultimate Credit Card Payment Program”

Simon Says:
May 5th, 2005 at 8:59 am
I can’t see any logic behind the divide total by minimum payment to rank order to pay. You should pay off the debt with the highest interest rate first (while maintaining the minimum amount for other debts), no two ways about it.
Letters From Exile Says:
May 5th, 2005 at 9:55 am
The Ultimate Credit Card Payment Program

I think every first year college student should be required to take a
class about money management. The first thing I would add to the
syllabus for that class would be a lecture and lab on credit cards.

The Wealthy Blogger has an article on how to pay ba
Mike Hillyer Says:
May 5th, 2005 at 11:42 am
Simon: I would go a bit further and say the highest interest cost; 18,000 at 7% generates more interest than 5000 at 18%. The reason for dividing is that you want to get the rollover working as quickly as possible by getting the payment money for the fastest payoff cards rolling into the next cards. If you highest rate card were focused on first you might have other cards get paid off before it ever does, leaving nothing to roll into.
cp Says:
May 5th, 2005 at 12:06 pm
Another trick is that credit card companies lately often run promotions with a (much!) lower interest rate than normal if you transfer your balance from another card. In fact, I’m currently taking advantage of an offer at 4.9%!!

Two things to be aware of though:

a) The low interest rate only stays in effect for a limited time period… Usually 3-6 months.

b) Any payments you make on the card typically go to the portion of the balance that is being charged the LEAST amount of interest. Re-read that last sentence!

In any event, if you have multiple cards and unused credit on one of them, check with the credit card vendor to see if they are running one of these promotions. There’s a big difference between paying 18% and 4.99% even if it’s only for a few months. Right now I’m taking advantage of this because it’s an even better rate than I can currently get with a line of credit from the bank (around 6%).

Corey
Mike Hillyer Says:
May 5th, 2005 at 11:46 pm
As long as after the introductory rate the standard rate doesn’t go above 18% I say go for it. The problem is I have seen cards with low introductory APRs that go up to 25% after the introductory period.
Susan Says:
May 6th, 2005 at 9:08 am
Right now President Choice Mastercard (in Canada, not sure if in the states) is offering a 3.97% balance transfer rate until the amount is paid off! The only caveat with these programs is to make sure that you don’t put any regular charges on the card in addition to the cheap balance transfer because if you do, future payments go to the low interest portion leaving the high interest portion to click on more interest.
Simon Says:
May 9th, 2005 at 8:41 am
Mike,

I am afraid that is just wrong. What your article suggests is that you work out the amount to repay, but when one debt is paid off, you don’t reduce it.

So you have a total debt of $x, and you are suggesting paying back a fixed $y per month. This is fine.

However, to make the lowest interest repayments, you should pay that $y on the highest interest rate earning debt. Paying back $10 on a $10 debt that incurs you 10% interest is better than paying that $10 on a $10 debt that occurs 5% interest, there is no way around it.

Not reducing your monthly payments when you clear a debt to remove the other debts is a good psychological way of getting your debts paid of quicker, however paying of your worse (interest rate) debts quicker than others reduces the total interest you pay, independant of how much you pay back.

Either way, just work it out with an example. Have a debt of $1000 at 50% interest, and 10 different debts of $2,000 and 2% interest. Set up the lower payments so that using your system you pay of the $2k debts first, this will show you why your plan is such a bad idea.
Mike Hillyer Says:
May 9th, 2005 at 8:54 am
Could you show a repayment table based on the numbers used in my repayment tables for debts and amounts to show how your solution shows faster repayments/lower interest? So far the numbers are not as much about morale as they are about getting paid off quickly and reducing interest paid. If you want to show a better way please do.

Perhaps when you have 50% interest things are different, but please do not disparage what I have proposed without showing a full alternative.
nickel Says:
May 9th, 2005 at 2:00 pm
I’m with Simon on this one. If you are paying a certain amount of money (total) per month toward a mountain of debt, it goes without saying that, once the minimums for each account have been met, allocating the remaining dollars to the debt that is incurring the highest interest rate will reduce your burden most rapidly. While the 50% example that Simon gave is extreme, and maximizes the effect of what he’s talking about, it doesn’t make it any less true. Yes, as the rates become close to one another, the advantage of this approach won’t be as great. But it will still be better than scaling your payments against something else, like the size of the debt.
–
fivecentnickel.com
Mike Hillyer Says:
May 9th, 2005 at 5:02 pm
Well, since nobody offered concrete proof, I decided to recompile the tables, and it looks like David Bach and I are wrong; 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. Is there any objection to my changing the post if I keep the comments intact and crediting?
Mike Hillyer Says:
May 9th, 2005 at 5:25 pm
I have posted a followup instead at http://www.wealthyblogger.com/uncategorized/the-super-ultimate-credit-card-payment-program/, sorry I doubted you guys.
nickel Says:
May 9th, 2005 at 6:41 pm
I ran a comparison of the various approaches and wrote it up here: debt payment calculations

I tried to send you a trackback, but it didn’t take for some reason.
–
fivecentnickel.com
Simon Says:
May 9th, 2005 at 6:49 pm
No problem Mike, and sorry if I sounded confrontational. Glad its all worked out now The 50% example was meant to be extreme to show how it works, but as its just maths; if it works in the extreme it will work the same way with a 0.1% difference.

This goes to the heart of some repayment plans as well, it is better to spend longer repaying your debt at a lower rate than it is to try and pay it off quickly at a very high rate. It would be interesting if there was a formulae to compare the two quickly ie, what is better to pay of $1,000 at 10% over 10 months or 15% over 7 months etc.
nickel Says:
May 9th, 2005 at 7:23 pm
Ooops. Didn’t see that you gave me a direct link in your newer entry. Thanks, and take care.
–
fivecentnickel.com
vickie Says:
May 21st, 2005 at 7:05 pm
Sounds like someone is a fan of Mary Hunt? If not you sure think like her!!
Mike Hillyer Says:
May 21st, 2005 at 7:14 pm
Never read her work, but you have to remember that this is nothing new. I have even read this in a booklet on money management from the late 60’s. I don’t claim it as my own, and I doubt it was created by Mary Hunt.
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