Noah Smith, Columnist

It's Not OK for Finance to Be Dangerous Again

Consumers make mistakes out of ignorance. They need help, not a regulatory rollback.

January 9, 2018 at 12:00 PM UTC

Noah Smith is a former Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

There's a reason this isn't scary.
Photographer: Ricardo DeAratanha/Los Angeles Times/Getty Images

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Suppose you have two loans. The first is a student loan of $40,000 with an interest rate of 6 percent, and the second is a credit-card balance of $12,000 with an interest rate of 11 percent. You find that at the end of each month, you have about $1,000 left over, and you want to use it to pay down the principal on your debts. That’s sensible. So how much do you put toward each loan?

The rational thing to do would be to pay off the 11 percent loan before even starting to repay the 6 percent loan. This isn’t a matter of taste -- it’s just simple math. After all, every dollar you spend paying down the credit card would otherwise be growing at 11 percent a year, which is faster than 6 percent a year. If you can, always pay down your debts starting with the highest interest rate.