Want to start paying off debt- who do I pay?

[familyblackout]

I am trying to get my family out of debt. We have a lot of small bills (anywhere from $200-$500) that seem like they should be easy to snowball. Now, we are receiving notices in the mail from various creditors, like Calvary, etc., who are offering us discounted amounts. Is it safe to pay them, or should I go to the source? The discounted amounts are so tempting, but I am worried that it is just a scam!
Thanks everyone!

[Libby]

I would call each of your accounts and ask if they have sent your accounts out for collections. I would never deal with anyone other then those whom I owe money to. Also inform them that you have full intent on paying your debts and see if you can work out a payment plan with them that works for both of you.

[khaski]

I agree, do not send a penny to anyone unless you have verified with the original company the debt has been transferred. On another note, if you are not in financial hardship and are able to do so, the right thing to do is really to pay the FULL amount you owe....you owe it, when you pay a discounted amount, you know who that $ they 'lost' comes from? The rest of us...the company will get their $ one way or another, and if you (all those who are behind on their bills or not paying at all) won't pay it, they up the charges on EVERYONE, current or not. People not paying or paying less amounts than they really owe jack up the costs for ALL. I wish more people had the integrity to pay the full amount if they can, instead of taking the 'easy' way out, but I also understand the temptation to do so. Just something to consider.

Whatever you choose to do, pick out which would make you happier- paying off the smallest bill first, or the one with the largest interest %, or the largest. Pick one 'attribute' and knock 'em all dead from there.

[mauimagic]

Good advice - please let us know what happens!!

[greekislandgirl]

Personally I would pay off first the that adds the most interest every month, NOT the smallest OR the one with the highest interest rate (unless that also was the one that adds the most interest).

So if you had:

Bill A: $50 at 5%
Bill B: $100 at 30%
Bill C: $200 at 20%

I would pay Bill C first. Just a basic example.

As far as collections, get a written letter from your company if you debt has been sold to collections and which agency (address etc). I have never been through this so I'm not sure how it works but I think that once a debt is sold to collections, you have to deal with the collections agency unless you can get the original debt-owner to cancel the debt (in which case it is their responsibility to deal with the collections agency). In any case NEVER pay a third party for a debt without written direction from the original debt-owner - otherwise you could be paying someone who doesn't own the debt, and STILL owe the money to the company!

[a.nonymous]

Personally I would pay off first the that adds the most interest every month, NOT the smallest OR the one with the highest interest rate (unless that also was the one that adds the most interest).

So if you had:

Bill A: $50 at 5%
Bill B: $100 at 30%
Bill C: $200 at 20%

I would pay Bill C first. Just a basic example.

To me that sounds like the worst strategy out of the three, especially given that scenario. I'll explain why.

Let's start with the A, B, C loans, and the assumption you could pay off $200 at the beginning of the year and nothing until next year rolls around. I'm doing that because it's easier to work with the numbers. (I'd have the same result by breaking it down to months or weeks, but the numbers wouldn't be as easy to understand.)

So, assuming all balances were left untouched, the interest would be
A: $2.50
B: $30
C: $40
Total: $72.50
Now, paying off the smallest balance first a la Ramsey is primarily to forgo interest savings but get an additional motivational boost by paying off more balances. I'll call it a whoopy unit for each loan paid off in full.

A la Ramsey, you'd pay off A & B in full and apply the remaining $50 to C.
That leaves you only with a balance on C of $150 plus interest of $30.
Total new balance $180.
You're saving $42.50 in interest and have earned 2 1/4 whoopies for motivation.

Paying off the highest interest first makes most sense mathematical, but you lose whoopies.
B would be clear, C half way done and A still complete.
Clean balance remaining $150 plus interest of $22.50.
Total new balance $172.50.
You're saving $50 in interest and have earned 1 1/2 whoopies.

Your strategy leads to C being gone but A & B being around in full.
Balance remaining $150 plus interest of $32.50.
Total new balance $182.50.
You've saved $40 in interest and have earned 1 whoopy only.

On both accounts, your strategy performs poorer than any of the other.

I assume you have a strong fixation on the pure interest amount and it gives you more motivation to pay it off in that order. But if you add up the numbers, you're even falling short on your own metric unless you have the ability to block out the existence of the other interest amounts adding up.

But maybe I am missing something else. So please do correct me if I'm wrong.

[mndtrp]

Dave's method also allows for freeing up cash flow. If that is a concern, paying off the lower amounts first is beneficial. If cash flow doesn't matter much, pay off the debt that is costing you the most.

For the OP, figure out who your money is truly supposed to go to, and then go from there.

[misteryu]

Usually I would recommend someone who has accounts in collections to just settle with them. However, given the fact that your balances are relatively low compared to most people, it might be worthwhile to just pay in full. This way, it reflects on your credit report as "paid in full" rather than "settled for less than full balance".

[Nishu]

The offers probably aren't a scam, they are something that creditors will do when they think they might not get any of their money at all. As someone else said, it does dink your credit so I'd try to pay the whole balance if possible. If they're sending offers like that, you're probably in bad shape already. Don't worry too much about its effect on other people if you accept the deal. Credit cards are a risky venture and that's why they have higher interest rates than secured debt. If the rest of us don't like it, we can avoid it by not using credit cards.

As far as which to pay first, since you have a lot of smaller ones I would use the lowest balance first snowball approach that Dave Ramsey recommends. It does help free up cash and wiping out a bunch of smaller ones will probably be both a boost to your credit and your outlook.

Good luck. : )