The Debtor’s Toolkit: Twelve Effective Tactics to Use When Tackling Debt

Almost every day, someone writes to me with intimate details about their debt situation. Some of them are pretty mild and can easily be taken care of with a little bit of elbow grease – others are horrifying and will take some very serious attention to manage.

In either situation, the principles for getting rid of that debt are much the same. Very similar tactics can be applied whether the debt is a $200 credit card balance or a mountain of $250,000 worth of various forms of debt.

Here are the twelve tactics I’ve used myself to conquer debt – and that I always recommend to others.

1. Know what you owe.
Many people in a painful debt situation are oblivious to the true amounts of their debts. They get bills, make the minimum payments, and try not to think about it.

That needs to stop. Right. Now.

Take the last bill you received for every debt you owe. Sit down with these statements and figure out exactly how much you owe in total on each one and how much interest you’re being charged. If you can’t find this information, call the company holding your debt and get it from them.

This is key. You need to stare the full problem in the face instead of hiding it from yourself. If you keep hiding it, you keep convincing yourself it’s not really a problem while those interest rates eat you alive. And they will. An average credit card with an 18.9% interest rate with a $1,000 balance on it over a year will cost you $189. Increase that balance and that timeframe and things get scary quick – a $10,000 balance on that card held over two years costs you $3,760. Compare that to what you make.

Sit down, look at the problem, and realize that it needs to be solved. That’s the first step.

2. Figure out a plan.
The first step for solving it is to figure out a plan – a debt repayment plan. I wrote in detail about building your own debt repayment plan in the past – the basic steps are pretty simple.

There are really two sensible methods to figuring out your debt repayment plan. The first one is the Dave Ramsey “snowball” method, where you list your debts with the smallest debt first and focus on paying them off in that order. This one has the psychological benefit of giving you a sense of success over debt much quicker – and then that positive rush will push you onwards to more debt repayment.

The other one is the one I prefer – the interest-based method. In this plan, you simply list all of your debts in order of interest rate, with the largest interest rate on top. This is mathematically the best route to go, but it doesn’t have quite the same psychological “push” that Ramsey’s plan has.

Either way, you not only need to know what all of your debts are, you need to figure out the relative priority of the debts. Once you know that, you have a plan – and now it’s time to execute that plan.

3. Get caught up.
The first step is to get caught up on your debt payments. If there are any debts you have where you’re late on your payments, just make the minimum payments on all of your debts until you’re caught up on all of the payments. Without at least some history of regular payments, it’s very hard to talk to creditors and have them sympathize with your cause and it’s impossible to have a strong credit rating (which helps you on your other bills).

If you’re behind on your bills, the first step is to get caught up. There are some great tactics down below for coming up with the money you need to catch up on these debts.

4. Negotiate.
If you’re fully caught up on your debts, try negotiation, especially with credit cards. Call them up (using the number on the back of your card) and flatly ask for a lower interest rate. Suggest to them that you’re considering moving the balance with a zero interest balance transfer offer. If the first person says no, escalate – ask to talk to a supervisor.

You won’t always have success with this method, but any success you do have will pay serious dividends for you. If you have a $10,000 balance and you get the interest rate reduced even 3%, that’s a savings of $300 a year. Applying that extra $300 a year back to the balance ($25 a month) can save you as much as $7,000 in reduced finance charges, according to the credit card repayment calculator.

5. Consolidate.
Another method is to actually combine your debts through consolidation. There are many options for consolidation – zero percent balance transfers on credit cards, student loan consolidations, home equity loans, and personal loans are among the most common.

The first thing you need to know is whether you have good credit. Check out your true free credit report at annualcreditreport.com (since freecreditreport.com is a rip off) and make sure everything is correct on there, and also make sure you have a strong payment history in terms of paying your bills on time. If you’ve done both, your credit should be solid.

Zero percent balance transfers are a solid way to consolidate your credit card debt and reduce those interest rates for a while. Most balance transfer offers retain that low rate for only a short period of time (eighteen months is common), so you should only transfer your highest interest stuff to it, not everything.

Another option is to hit your local credit union and see what options are available to you. Many times, if you’ve been paying your debts consistently and have solid credit, you can apply for a personal loan to help you whack through your outstanding debt. Often, personal loans have solid but not stellar interest rates – good enough to wipe out credit card debt and other consumer debt, but that’s about all.

If you own your own home, a home equity line of credit is yet another option. This is often a lower interest rate debt that you can use to consolidate almost everything that has a higher interest rate.

All of these options will change your debt repayment plan, causing some debts to move up and others to move down. Adjust accordingly so that you’re sure you’re tackling the right debt with your extra payments.

6. Get some inspiration.
Debt repayment is a long, slow process and without some sort of inspiration it can be very hard to keep it up over the long haul. My suggestion is to find some inspiration – something you can visualize and think about when you’re repaying your debts. Why are you doing this? The answer to that question should point you right towards your inspiration.

For me, my inspiration is and always has been my children – my son and, later, my daughter, too. They show me that there’s an awfully big future ahead. They show me that the choices I make now have a lot of ramifications down the road. They show me what unconditional love is – and that stuff is just waste in comparison to that.

I keep my credit card wrapped in a picture of them, just so I can remember this when I go to spend some money.

7. Don’t rack up more debt – have an emergency fund first.
Now that you’ve got a good debt repayment plan, everything’s in order, and you’re inspired and ready to go, it’s tempting to go full-out on debt repayment and knock those numbers down. There’s only one problem – what will you do if your car blows up tomorrow? What happens if you lose your job?

If you really want that debt to disappear, you need to protect yourself against these events first, at least a little. The way to do that is with an emergency fund – basically, cash sitting in a savings account somewhere to help you through those tough times.

I recommend having at least a month’s worth of living expenses in there before you start going hardcore with debt repayment. This money can be used for stuff like car repairs, unexpected big bills, and so forth – it keeps you from having to go back into debt when something like that comes along. It’s better to have even more than that – when your situation gets under control, you may want to pump up your emergency fund.

Make minimum payments on your debts at first and build up your emergency fund. I use ING Direct for that purpose – they’re my primary bank, but they let you set up multiple savings accounts with just a few clicks. Make one of them your emergency fund.

8. Automate your minimum payments.
Online bill pay is one of the most powerful tools we have for battling debt. Most banks now offer this amazing service, which basically cuts down on the time you have to spend paying bills – but has a few other perks as well. I know it’s become an essential part of my toolbox – ING Direct’s tools for online bill pay are great.

One big perk is the idea that you can schedule payments. Automatic scheduling of payments is a great way to make sure you’re never late with a bill again. Just schedule a certain amount to be paid each month well in advance of the bill’s due date. For those with variable amounts, like credit cards, use an amount that’s higher than the minimum payment, but not overly so.

Each month, then, you know that your minimum payments are covered. Your goal then is to make a big extra payment towards whichever debt you’re focusing on in your debt repayment plan, every single month. The next few tactics will help you do just that.

9. Trim away some fat.
Look at the ways you spend money each month and look for things you can easily trim. A great place to look are the monthly bills (can you trim whole services, like Netflix, or perhaps just pieces of services, like unlimited text messaging?) and also the things you do during your daily routine, like drinking a latte. Any time you can reduce or even eliminate the costs of any such routine-oriented thing, you’re doing well.

One nice place to start is with your energy costs. Installing a programmable thermostat or some LED or CFL lightbulbs can easily lower your home energy costs. Making your next car purchase a fuel-efficient one will lower you automobile energy costs.

The key here is when you’ve saved some money, don’t spend it. Instead, channel that amount into an extra debt payment each month. Let’s say you eliminate a $4 latte per week. That means your extra debt payment each month should go up $16. Cancelled that premium movie channel? Your extra debt payment should go up $15. Installed 25 CFLs? Your extra debt payment should go up about $10. These add up.

10. Snowflake.
Snowflaking is a brilliant little tactic I first heard about over at the Paid Twice blog. The idea is simple: whenever you have a little windfall or make a good frugal choice, immediately save it for an extra debt repayment. I found that one of those “extra” savings accounts at ING Direct works really well for this – whenever I save a little money or have a little windfall, I move that amount from my checking over to the “snowflaking” account. At the end of the month, I use that snowflaking account as an extra debt payment.

Here’s an example. Let’s say that I normally eat out for lunch three times a week, but one day I decide instead to just eat leftovers, eliminating one of those meals eaten out. I then immediately move the $8 cost of lunch from my checking account to my snowflaking account. Similarly, let’s say I find a $20 bill on the street. Instead of spending it on silly stuff, I go home and move $20 from my checking to my savings, then use the $20 for something worthwhile, like groceries. Recently, I found a coupon for 10% off a complete order at Target. We stocked up and saved about $24 – that money was snowflaked. At the end of the month, there’s $52 that I can add into my debt repayment to help knock out that debt.

11. Watch your progress.
Each month, it’s worth your while to take a tally of all of your debts and look at where things are. Over time, you’ll begin to see real progress. Many personal finance books recommend charting this progress – noting your debt total one month, then your debt total the next month, and so on – so that you can really watch the change.

Why do this? It’s a big psychological boost to see your debt heading in the right direction instead of in the wrong direction. At first, I even used a large progress bar to visualize it, going from $17,000 in credit card debt down to $0. Each month, as that balance went down, I filled in a portion of that bar. It felt good to do that – really good.

12. Don’t let up.
When your debt starts going down, it’s easy to start feeling like things are under control, and you’ll become tempted to throttle back on the savings. “I don’t need to make that extra debt payment – things are good now!” That’s a false belief – it’s that very belief that got you into trouble in the first place.

Remember, every time you feel that you don’t need to pay down your debt, you’re reverting to the mindset that got you in trouble to begin with. Keep that in mind, always, and don’t let up. Debt freedom is a wonderful state to be in.

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16 thoughts on “The Debtor’s Toolkit: Twelve Effective Tactics to Use When Tackling Debt

  1. Andy says:

    Solid advice. My girlfriend is getting ready to take on some debt for medical school. She will get free tuition, but will still have to pay for taxes and living expenses. I am glad I am reading up on this now since in a few years that could be my debt.

  2. I like the snowflaking idea.
    I use a similar tactic, but since I have only my mortgage to re-pay and no other debt, my tactic goes toward investing.
    Before I paid off my $40,000 in student loan debt, I saved like a banshee!
    Don’t ever nderestimate teh psychological benefits of paying off a debt. I feel a huge relief right now, even though I still have a mortgage.
    I loved the feeling of paying off debt so much that I’m contemplating trying to pay off my mortgage, but my interest rate is super low. It will be 3% starting July 1,2008…food for thought I guess.

  3. Bella says:

    Thank you again for your precious advise!
    Although, I think it is useful to start repaying debts before/while setting up an emergency fund: the interest rate on debt is always higher than the one we get off a savings account. Therefore, it is important to start “saving” on interests. As for the emergency fund, I don’t really see why we should save it first instead of adding any emergency to debt: we will at least have saved the interest while repaying if ever an emergency happens.

  4. George says:

    Regarding an emergency fund, I heard saving enough to last three or four months is important. A lot of kids rack up huge debts going to grad school and pricey private colleges. It could be considered good debt if you pick the right major.

    Nobody wants to face reality. Thats why we don’t like to list all our debts on paper.

    Regarding inspiration, I have never heard about keep a kids picture next to your credit cards. I am sure that works. Wow!

  5. Cathy says:

    I love snowflaking! I have a sub account in my ING savings account I call “Penny Jar”. I just paid off my significant debts, and got a significant raise with a new job. I don’t plan on changing my lifestyle habits at all. All the extra money is going into the “Penny Jar” where I will eventually make plans to invest it.

    Don’t neglect the emergency fund when working on paying down your debts. I’m a firm believer the emergency savings account I built while paying down my debt allowed me to keep control of my finances.

  6. bakednudel says:

    I know you probably think this kind of column is repetitious, but I think it’s inspiration that I need to read every single day.

    I was only able to do step one for the first time two days ago. It was a real shock. I’m sure it’s difficult for those not in this situation to understand, but I was AFRAID to add up my debts. I knew I was spending more each month than I make, and making up the difference on credit cards. It’s all come home to roost, but I’m going to try to crawl out anyway.

  7. All you can do is crawl out, one dollar at a time. Good for you. If you’re in so deep that a financial planner says there’s no hope of getting out, check into filing for bankruptcy and starting fresh. There is always an answer to getting out of debt,unless you become an extreme repeat offender.

  8. mary says:

    “If you own your own home, a home equity line of credit is yet another option”. This is the only thing I disagree with in this article, many people I’ve seen wind up in more trouble after they take out the second mortgage and thats what it is a “second mortgage”. After a few months of zero credit card balances and seeing they have consolidated everything into one neat package which costs less a month they usually go back out and get back into debt. Plus you put your home at risk. IMHO

  9. BIll says:

    Bella,

    A few comments regarding your point about paying debt prior to building an emergency fund.

    #1) Why not pay on an emergency through debt? Well, that premise missing the bigger point here. The one way to ensure you stay in debt is to keep using debt. An emergency fund helps to prevent you from using debt any more in the face of an emergency.

    #2) The savings interests vs. the debt interest. Again, the point is to get out of debt. Slow and steady wins the race. If you don’t build up an emergency fund and start attacking debt to save the associated interest expense, you almost assuredly will get hit with expenses that will move you to lean on debt again. And, ultimately, if interest expense was the main concern/issue, people wouldn’t go into debt in the first place.

    It is imperative to have an emergency fund to support you as you get out of debt.

    Sincerely Bill (debt free and loving it)

  10. Dannalie says:

    I am working a debt snowball. At first it looked impossible, but it’s starting to finally roll. The key is to not incure any more debt. Two cars should be paid off in the next 3-4 months which means I will take those payments and pay towards CC debt. I should be debt free in 18-24 months.

  11. Philip says:

    Great post. I particularly enjoyed the idea of snowflaking. What a great way to add extra to the debt on top of my snowball. As far as the snowball goes I’m in Dave Ramsey’s court on this one. I tried the interest rate one several years ago, but because I didn’t make any progress I dropped out. In Dave’s plan you begin to see progress really quickly which really gives me an incentive to keep going.

    For Bill. Absolutely an emergency fund is important. That was one of the things in my current plan that keeps me on it. As soon as I started Murphy came over to try and discourage me. My car blew an alternator, starter motor, and computer all within one month. Thanks to my emergency fund and a budget I was able to cashflow these problems and keep focused on my debts.

  12. Chris says:

    Amazing post! It’s great to see all of these tips together, I’m sure this will help a lot of people.

  13. jm says:

    Trent, just a slight writing criticism: you use the word ‘solid’ many times in that article, specifically in #5. This might be a crutch word for you, which you could do well to work on.

    Other than that, its great to have all of these steps laid out in one place.

  14. Simple Mom says:

    I, too, love both snowflaking and ING, but I put any snowflake I have immediately towards my student loans, which are my last debt. It helps that there’s no limit to how many payments I can make. But somehow, it feels better to make lots of little payments instead of one extra big one at the end of the month. It’s fun to watch the balance fall.

  15. Thanks for this really helpful and thorough checklist of things to think about when it comes to debt. Many of the computer consultants I advise that are starting their own businesses see their debt as a major obstacle to becoming an entrepreneur, and many delay the process of starting their own companies because they want to get their finances in order, but then have no idea of where to start. It’s definitely possible to get rid of debt, and it’s also possible to strike a comfortable balance between eliminating debt and getting on with your professional and personal life. These strategies are a good start!

  16. Matt says:

    I found that the best way for me to get out of my debt was to increase my income. It took a bit of time, but after some smart thinking I was able to change jobs, start up my own business and am now earning double what I was previously. I admit this wasn’t easy. It did take a lot of hard work. BUT, having now got my debt under control, I really need to make sure I monitor my expenses and ensure that I don’t get back into that situation where I was maxed out on my credit cards.

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