This week, popular free online budget site Mint.com launched a new tool that helps people figure out when they could be out of debt and keeps them updated on their progress.
I’ll explain how it works, along with its pros and cons, in a minute. But first, a little background.
Making Budgets Cool
When Mint and several competitors launched a few years ago, they did what I never thought possible; they made it appealing to use a budget. This has long been a tough sell, but by bringing budgeting online, the idea caught on quickly. Today, Mint has almost five million users.
The main barrier for people is that you have to enter all of your bank account and credit card passwords (see my previous post, Is Mint.com Safe?). If you’re comfortable doing that and are then willing to spend a little time setting up a budget, Mint will quickly and easily show you how your actual spending in each spending category compares with your planned spending.
We use Mint in our household and have been mostly happy with it. Most mornings, I log in for a few minutes to see how we’re doing, make sure our most recent transactions were categorized correctly, and then manually enter any cash transactions.
Mint rolls out new features on a regular basis, and last summer launched a Goals tab, where you could choose among nine goals, such as buy a home or get out of debt. It then suggests a series of next steps and tracks your progress.
Since the Get Out of Debt goal was, by far, the most popular, and because revolving debt like a credit card balance is a different animal than installment debt like a student loan, the company decided to split the Get Out of Debt goal into Pay off Credit Card Debt and Pay off Loans.
If you choose the Pay Off Credit Card Debt goal, Mint will show you each of your credit cards along with their current balances, ask you which ones you want to pay off, and then instruct you to fill in the interest rate and minimum due. When you’re done, it will show you how long it will take you to get out of debt if you make just those minimum payments.
By moving the slider, you can easily run other what/if scenarios, showing how much more quickly you’ll be out of debt if you pay more than the minimums.
Which Debt to Pay Off First
There’s a perennial debate among personal finance teachers as to whether it’s best to pay off your highest interest rate debt first or the one with the lowest balance.
Some people, myself included, recommend going after the lowest balance debt first, pointing out that it feels good to knock out one of your debts as soon as possible. It’s an emotion-based argument. The assumption is that making fast progress will give you the motivation to keep going.
Others recommend going after the highest interest rate debt first, reasoning that doing so will get you completely out of debt the fastest and cost you’re the least amount in interest. When I’ve run different scenarios, I’ve found that this is, indeed, the approach that will get you completely out of debt the fastest and with the smallest interest cost. However, the savings of time and money are relatively small compared with going after the lowest balance debts first.
Mint’s system creates a payment plan focusing on paying off the highest interest rate card first.
Aaron Forth, Vice President of Product in the Personal Finance Group at Intuit, which owns Mint, told me, “It was a debate that was had passionately.” He explained that the folks at Mint tend to be “a quantitative bunch,” so it’s natural that they would set up the system to go after the highest rate debt first.
But they’re not all numbers and no heart. After someone pays off a debt, Mint is set up to send a congratulatory e-mail. Figuratively speaking, Forth said Mint “used to yell at people for going over budget… Now, we’re giving them a pat on the back for paying off their debts.”
Still a Bug or Two
I was able to test Mint’s new Pay Off Credit Card Debt goal since we have three credit cards (of course, we pay our balances in full each month), and I found a few issues.
Most importantly, after entering all of our information, it came up with this ill-advised suggestion: “Keep yourself in check: Consider using your E HEALTH SAVINGS NOW debit card for purchases.” That’s our health savings account, which is only to be used for medical expenses. We have a debit card attached to our regular checking account, which is the one it should have recommended.
In the past, when Mint has added new features, they have had a few bugs. I trust they’ll get things smoothed out soon enough.
“Minimum Payments” Needs Clarification
One last point has to do with Mint’s advice about making your “minimum payments.” Let’s say you have multiple credit card debts and you wisely decide to pay more than the minimum. While applying that extra amount to one of your cards, Mint reminds you to keep making your minimum payments on all of your other cards.
But here’s the somewhat confusing issue: there are two types of minimum payments: a “fixed” minimum and a declining minimum.
If you stop using a card and pay the minimum amount required each month, then each month the card company will require a little less of a payment. That’s because your balance is declining a little bit each month and your minimum payment is based on a percentage of that balance. Paying this declining minimum is what keeps people in debt forever.
On the other hand, if you fix your payment on this month’s required minimum – if $29 is required this month, you keep paying that amount every month even when the card company asks you for less – you’ll get out of debt much faster.
Fortunately, when you look at the details of the payoff plan Mint creates for you, it’s clear that Mint’s plans are based on an assumption that you will fix your minimum payment at the amount due this month. This is a wise step and one that I have long recommended. Mint should simply do a better job of calling this out. Otherwise, some people may interpret its advice as “pay the declining minimum.”
Overall, I like the simplicity of Mint’s new tool, and believe it will help motivate people to pay more than their minimums by easily showing them the benefits of doing so. If you don’t use Mint, or if you prefer to set up an accelerated debt repayment plan that focuses on going after your lowest balance debts first, you could use the free calculator on my site.
Do you use Mint? What’s been your experience?
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