Updated on 09.03.14

Personal Finance 101: Comparing Debts and Developing a Debt Repayment Plan

Trent Hamm

Steps to Help You Get Out of Debt

A reader wrote in recently:

I have kind of a weird situation with our 2 credit cards, and wanted to see what you thought. We have one card (Citi) with a total balance of $4,800. $3,800 of this is a balance transfer that is at 2.99% until paid off. The remaining $1,000 is at 13.49%. Of course, all principal payments are applied to the lower rate debt first. Our other card (Chase) has a balance of $5,700, and is at 0% until September 08, when it goes to 8.99%. Which card do you think is best to “attack” first?

After reading this email, I thought it would be a good time to take a more general look at comparing the debts you owe as well as how to construct a healthy debt repayment plan. This is the kind of “nuts and bolts” personal finance that’s well worth sitting down for a half hour and doing every once in a while, as it can save you a ton of money if you have more than a debt or two.

Obviously, this only works if you commit to spending less than you earn. If you’re spending more than you earn – and thus building up debt each month – you’ve got a much more serious problem to solve before you should start a debt repayment plan.

Getting Started – What You Need

To get the ball rolling, you’re going to need a few items.

A few sheets of paper and a pen

Even though I spend tons of time at the computer, I still find this to be a good exercise to do with a few sheets of paper and a pen. Doing this little task by hand adds to the concreteness and importance of the exercise – and there’s really no math to do by hand here, either, so you don’t have to worry about needing calculation tools.

The latest statement for every single debt you have

You’ll also need the latest statement on every single debt you have: your mortgage, your auto loans, student loans you’re responsible for, any other outstanding consumer loans, credit card statements, and so on. Everything. Make sure that on this statement you can identify the annual interest rate (APR or APY, it’s not important to distinguish between the two for the purpose of this exercise).

Making the first list

The first thing you should do is make a list with four columns consisting of the name of each debt you owe, the amount you still owe on that debt, the monthly payment for that debt, and, most importantly, the current interest rate on that debt. You should be able to get all of this information easily from the statements. The goal here is to get all of that information into one place.

Which Debts Take Priority?

Now that you have the list, you can put the statements off to the side – everything you need is now on this one sheet of paper.

Order all of the debts by their current interest rate.

Now, go through that list and number the debts based on their interest rate. Give the highest interest a big number 1 off to the left, the next highest a big 2, and so on. Don’t worry about which debt has the biggest balance – that doesn’t actually matter when figuring out which debt is the most important one to pay off.

Look for ways to reduce the rates, focusing most strongly on the highest current one.

Now that you’ve ordered the debts, go to the debt marked with a 1. Is there any way you can reduce that interest rate? If it’s a credit card debt, you could call the credit card company and ask for a rate reduction, or you could transfer the balance to another card for a lower rate. You might also be able to pay it off with a home equity line of credit or with a personal loan from your credit union. Maybe you can consolidate your student loans at a very low rate. The key is to lower that interest rate. Go through every one of your debts from highest to lowest interest rate and do your best to get each rate nice and low. Obviously, there are some rates you’re likely to be unable to easily change, like your mortgage rate, but see what you can do about most of the rest of them.

When you’ve reduced rates, make a new list reflecting the changes.

As you get each rate lowered, update your list – cross off the old rates and write in the new ones, and likely cross off a few lines entirely and add new ones (if you consolidate or do balance transfers). If you wind up with two different interest rates on the same balance – after a balance transfer, for example – write down the interest rate that you’d be paying off first with any extra payments and ignore the other rate.

Once you’ve lowered all the rates as much as possible, rewrite the whole list so it’s clear, except order them directly by their current interest rate with the highest rate on top. This is your debt repayment plan – it will save you a lot of money if you stick with it.

What about debts that are set to adjust in the future?

One aspect that often confuses people is how to handle debts that are set to adjust in the future. I generally ignore these adjustments and apply one simple rule of thumb: it’s always best to be in the best possible situation one month from now because the future is unclear. You may end up consolidating those debts, or maybe a windfall will come suddenly. Because of that uncertainty, look at the short term when repaying your debts and ignore possible future adjustments – it’ll make the planning easier and guide you down a path that, no matter what, is at the very least close to the best possible plan and often is the best possible plan.

Yes, I’m aware that situations can be constructed where it’s arguably better to worry about the adjustments early, but given the uncertainty of what may come and also the high level of confusion one adds to the discussion in order to shave off a few extra dollars, it’s not worth the speculation. Build a plan – one that’s simple, makes sense, and is either optimal or very close to it – and stick with it, and you’ll be just fine.

How Do I Use The Plan?

Direct all of your extra payments towards the top debt on the list.

Each month, make minimum payments on all of the debts on the list except for the top one. With that top debt, throw everything you can at it. Make a double payment or a triple payment or more. This is a great time to use the snowflaking strategy – whenever you come into a few extra dollars during the month, due to living cheap or a little unexpected windfall, immediately apply that cash to the top debt on your list.

When a debt vanishes, cross it off and feel good about it!

Over time, you should be eating away very quickly at that top debt, and (hopefully) before long you’ll be able to eliminate it. Cross it off the list, celebrate a little, then start hammering away at the new top dog on your list.

When Do I Need To Update The Plan?

Update the list when you acquire a new debt.

Whenever you get a new debt, it’s going to need to find a place on your list. Stick it in there wherever it belongs based on the interest rate.

Update the list when one of your debts adjusts to a new rate.

Whenever a debt of yours adjusts in interest rate, cross it off the list, then add it back in just like a new debt where it belongs based on the new interest rate.

After you do this a few times, it’s useful to rewrite the list so that everything remains clear on it, but it’s fun to hold onto the old one (with some crossed-out debts) to remember where you came from.

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. Brian says:

    Dave Ramsey would NOT be proud. (kidding) :)

  2. Faron Benoit says:

    Great article. Consolidating debt is not always the best option due to closing costs. I agree about the interest rate, a very important factor when trying to tackle debt.

  3. Nice plan; alternatives include paying off smallest amounts first (to experience the ‘quick win’).

    Interetingly, in the reader’s case (if I read correctly) his ‘consolidated’card is at a Combined Effective Rate of only 5.2% … because he can’t attack the 13% portion until he pays off the 2.99% portion I would do the following:

    1. Pay off the other card first, then

    2. Buy an investment using the money that he would have paid the 5.2% debt off with … after all 5.2% is a very low rate of interest.

  4. Moneymonk says:

    sounds like the Dave Ramsey plan

  5. I’ve not read Dave Ramsey, but the name seems to appear frequently when talking about getting out of debt.
    I’ve long been a proponent fo retiring consumer debt and have no consumer debt myself.
    It would be possible to invest the money at a higher rate and make the minimum paymetns on the debts. However, this requires financial extreme discipline. Obviously, this reader would not be in the situation to write this letter if their financial discipline was that strong.

  6. oldmiter says:

    I disagree with post #2. While it is true that in the first month the effective interest rate on card #1 is is only 5.2%, that rate increases every month to approach 13.49% as only the 2.99% portion is being paid off. The best thing to do is pay the minimum on the 0% card and pay as much as they can on card #1. That’s the only way they can get to the high rate portion of their debt, unless they’re going to do more balance transfers.

  7. Brian says:

    I’m not sure I understand 7million7years – pay off a 0% debt while accruing interest on another debt? The goal is to develop a plan to get out of debt, not weigh whether investments would be better than paying off debt. Only in the case of perhaps student loans or a mortgage at a vert low (and fixed) interest rate would this be arguable. Otherwise, everyone should pay off debt prior to investing.

    It’s hard to make a call on this without knowing how much the person can commit to paying each month. If it’s peanuts, then the 0% might be the way to go, as that debt will soon be 8.99%. However, if it’s sizable, then it would be better to pay the current debt off and avoid that interest on TOP of the 8.9% later.

    Regarding the Dave Ramsey comment… this is not the Dave Ramsey plan, exactly the opposite. Dave recommends you pay off the lowest BALANCE first, not the highest interest rate, arguing that emotion trumps numbers for people in debt. This is the biggest controversy over his plan. In reality, you could end up paying more in interest over paying off the highest interest rate first, but, as Dave argues, if you had that much discipline you wouldn’t be in the mess to begin with.

  8. Bella says:

    Pretty logical… A major problem when people start trying to slash debts is the yo-yo problem: People try to put all they can into a said debt (let’s say a credit card) to save interest and reuse the same card in the month and end up never seing the end of it… It is impossible to monitor the progress and see an end to it, when doing the yo-yo process!

  9. I had a similar issue when I began paying off my credit cards five months ago (I mean, seriously paying them off, not just thinking about it).

    I wasn’t sure whether to hit the balance transfer (part of which was at a higher interest rate) with the majority of my payments, or whether to pay the lowest balance first. Luckily, I did as Trent recommends: I called my credit card company, and due to my good credit history, they lowered my interest rate. That made my decision much easier, and I ended up paying the lower balances first. Now I just have one credit card left to pay off (less than $3000!) and then I begin on my student loans. . . . at 8.25%. Yes, I consolidated years ago, before the era of low interest rates. . . .

    I suppose another thing this person could do is open another balance transfer account at a low rate (if he can find something that low) and transfer the whole enchilada again. . . . (except for the 0% balance).

  10. Phil says:

    Both the plan Trent outlines and the Dave Ramsey Plan already mentioned by several people can be effective approaches, depending on how disciplined a person is, how successful they are at lowering/transferring balances and what life throws at them in the interim.

    As a practicing financial planner, financial educator and financial counselor, my experience over the last 13 years with several hundred clients with debt issues is that their largest debt often also has the highest interest rate and will take a l-o-o-n-n-g-g time to pay off.

    As a result, I find the DR approach works better in a significant number of cases. It is tough to argue with the psychological boost and improved confidence that comes with “easy and early” wins as small debts are paid off and I find more people stick with it.

    Trent’s model costs less in the long run, but my anecdotal evidence is that it isn’t as effective. Who’s up for a double-blind, placeo-controlled trail to figure it out?

    Good article, as usual, Trent!

  11. SJean says:

    To mathmatically determine whether or not to pay the with rate changes first or second, you would need to know how much money you will be paying towards it between now and spet 08.

    Then you could whip up some equations and figure it out.

    But that is probalby over complicating things and won’t make a huge impact. Trents advice is good.

  12. I direct almost all of my “debt budget” to the card with the highest interest, but I still pay a little more than the minimum on my other two cards. The math doesn’t add up in terms of efficiency, but it makes me feel like I am making a dent in all my accounts. Crazy how we can fool ourselves.

    I usually like paper and pencil, but I have been using google documents. I like the fact that I can update my spreadsheet from almost anywhere (usually during lunch at work) right after I pay a bill.

    I am on a very strict and aggressive debt repayment schedule, and I like to look at my spreadsheet to remind myself that I am making progress – while drinking the crummy free work coffee instead of buying it buy the cup at a coffeeshop.

  13. Anna says:

    I ended up on the winning end of not consolidating debt. I have three student loans, with two different rates. Consolidating would have raised the interest rate on the two lower-rated loans.
    But that’s not all! The two lower-rate loans were also small enough that I had to pay a minimum payment. I was putting extra principal on every month, and ten year loans will end up being paid off in seven.
    I’m glad I didn’t consolidate!

  14. Joe wHealth says:

    Are you still using the Citi card? If so, stop. Your grace period is gone and all purchases immediately start getting charged a 13.49% rate. You are not allowed to use that card again until the balance reaches zero.

    Are you paying off more per month on these cards than you’re charging? In other words, is the total balance of the two increasing or decreasing? If the total balance is increasing, then get draconian on yourself. You are not allowed to spend more on credit cards than you pay. Period. Only when you get to the point where you haven’t revolved a balance for a long time, can you revisit this rule and start thinking about gaming teaser rates on cards.

    How much money do you have combined in your checking, savings, and money market accounts? If it’s more than 1 month’s worth of take-home pay, take that amount above 1 month’s worth of take-home pay and apply it to the Citi card, and then the Chase card (if there’s still some left).

    Past that, apply every cent you can to the Citi card until Sept ‘08.

    Why? Beyond Oldmiter’s point (which is right), your immediate goal is to have at least one card, other than the Chase card, with a zero balance by Sept ’08.

    Why? Because then you’ll have more leverage to negotiate the Chase balance that’s about to go to 8.99%. At that point, you can call Citi, see what deal they’ll give you for a BalTransfer, then call Chase and see what deal they’ll give you, then call any other cards you might have and call them.

    And when you get that balance renegotiated to the best deal, kill it. Mercilessly.

  15. kim says:

    I love everything about this article except for the advice to use HELOC funds to pay off unsecured debt. I understand that you were going for the lower interest rate, but I would be very careful about putting a house at risk. If there is an unexpected financial crisis, especially in today’s market, it would be very easy to end up upside down in your mortgage. The rest of the article is pure gold.

  16. Kacie says:

    I agree with Kim. I don’t think it’s wise to take out a HELOC to pay off credit card debt, because you’re not really “paying it off,” you’re just moving it to another source.

    Just pay off the dang debt already! Get the lowest rates you can on your cards, and attack them.

  17. Melissa says:

    Great article! I’m currently having this exact same issue, and I’m going about it in the way you suggest. I should have the first card paid off next month and I can’t wait!! If I had known it was this satisfying to pay off my debts, I would have started a long time ago! :)

  18. Bob says:

    Good article, I enjoy your blog.

    Is this a math problem or an behavioral problem? I’ve seen 3 mathematical solutions.
    1) The author (mostly math)
    2) Dave Ramsey (mostly behavioral)
    3) Post #3 (pure math)

    Rather than state my personal opinion, I would ask rather than which is the mathematically best, if you explained the system to 1000 people carrying consumer debt and ask them to execute them, which system would produce the most debt free people after say 3 years?

  19. moonimus says:

    Good article on organizing your debts. In the reader’s case, I would probably see if I could raise the credit limit on the 0% card and transfer the 2.99% balance to the 0% card. That way you avoid the 13% accruing on the $1,000 balance. Even though the interest goes to 8.99% in September, all the payments made on the balance would go towards principal.

    I have a question for you guys. We have a student loan at 2.75% and a mortgage at 6.375%. Would you pay off the mortgage before you paid anything extra on the student loans?

  20. George says:

    Trent, you hit it on the nose when you said,”Obviously, this only works if you commit to spending less than you earn. If you’re spending more than you earn – and thus building up debt each month – you’ve got a much more serious problem to solve before you should start a debt repayment plan.”

    The sad reality is that 99% of the people do not spend less than they earn, and that is why they are so much in debt on their credit cards.

    This plan will really not work for most people because most people do spend more than they make.

  21. Margaret says:

    I ran some numbers myself. Assuming that the debtor continues to pay to same amount (e.g. if minimum payments this month total $200, then continue to pay $200 even when minimum payments decrease), the differences between applying the extra money to one debt over the other is only in the tens of dollars (according to my calculations to the end of ’09). The difference between paying off the cards at $200 per month and paying them off at $220 per month (an extra payment of $20) is hundreds of dollars. So my opinion is that the debtor is better off looking for ways to squeeze an extra $20 or more out of the budget than worrying about which card to pay off first.

  22. paidtwice says:

    Thanks for linking to my snowflaking post. :) This is a nice example of where looking at the basics and then trying to make small extra payments would really help the reader kill those debts.

  23. jtimberman says:

    Just to reiterate: Dave Ramsey’s dumping debt method is to attack the lowest balance first. Attack. With reckless abandon and gazelle like intensity.

    @Brian “arguing that emotion trumps numbers for people in debt.”

    Yep! If people “did the numbers” first, they wouldn’t borrow money in the first place. Paying interest, no matter how low the rate, doesn’t make *mathematical sense*. Get over your “but the results are worth it” garbage. If we’re talking *purely* numbers, borrowing money loses every single time.

    @Phil: Yup. I’m a Financial Peace University Coordinator at my church and we’ve had over 100 people complete the class so far. Dave’s plan worked best for everyone who was struggling, as most people had major “wins” just in the 13 weeks of the class.

    @Kim: Ayup! A HELOC puts an enormous amount of risk on your home. Not only does this not really work (you can’t borrow your way out of debt), but if you can’t pay the loan, they can take your house, whereas plain ol’ credit card collectors can’t touch your house – it’s not collateral on your credit cards. Sure, they’ll threaten to, but the worst they can really do is garnish your wages after suing you.

    @Kacie: Yes, I agree, this reader asking the question should pay off the debt already. Less than $5000 is a couple part time jobs for a few months. Deliver pizzas, toss boxes for UPS or even bus tables at Denny’s. Something. $5000 is a pittance of credit card debt. The average household income in the USA last I looked it up was around $42,000/yr, and $5000 is a little more than 10% of that. Quit spending money on eating out, DVDs, going out to movies and clubbing, whatever.

  24. This is what worked well for us when we paid off of our consumer debt.

    First we paid off the debts with the lowest balances first just to get them out of the way.

    Second, when we had two or three of the larger debts remaining, we began focusing on the one with the highest interest rate.

    By doing this we benefited from the initial excitement/motivation of paying off debts (Dave Ramsey) with the mathmatical benefit of paying of the higher interest rate loans.

  25. JW Thornhill says:

    I find it interesting that you suggest listing the debts in the order of interest rate, which is exactly the opposite of what some other say.

    I feel that its a personal decision which order you put them in. While one person my be more motivated by quick knock-offs someone else might be motivated by something else.

    In one case, I was simply motivated by the fact that I’d had a bad encounter with a collector. So, I made sure to get rid of that one first.

    Its all personal.

  26. For most people debt is something that should be eliminated. It will grow until it consumes them. I became debt-free at 35 and was ably to start significant wealth-building at that time. Wealth building, like debt, can become very addictive – but is certainly much less destructive.

    Best Wishes,

  27. Brian says:

    Wow jtimberman… I don’t see where I ever typed “but the results are worth it” at all. I didn’t argue for either point, I just expounded on them both since there was confusion. Trent’s plan does NOT follow Dave Ramsey’s advice, but a few comments in someone said that’s what it was. I was merely clarifying the differences.

    Personally, I think Dave Ramsey’s strategy is pure genius for probably 90% of people trying to tackle debt. I imagine 10% or less have the discipline to tackle it in purely mathematical form and stick with it, evidence to why Dave Ramsey has grown so popular.

    I advocate NO debt, unlike the commenter I was replying to who advised to keep the 5.2% CER debt and invest all but the minimum since returns would be greater. I personally do not think anyone should be investing if they are carrying credit card debt, end of story. The only debt I feel is okay to carry while still investing would be low-interest fixed student loans, and your mortgage. Period.

  28. To clarify: I would not pay either card when interest rates are under the standard variable mortgage rate … I would be financing new real-estate, or paying down the mortgage on my existing (IF I’m not breaking the 20% Rule). The plan I outlined above starts when the 0% period ends.

    Remember: The object of PF is to end up with MORE money not pay down debt (that’s just a means to an end).

  29. gr8whyte says:

    Stop using both cards immediately for routine purchases and save them for emergencies only. Use cash/checks until the cards are paid off. If you have to charge, use the Chase card (lower rate) but fight the urge. If necessary, place the cards in a container of water and put it in the freezer but do not microwave to thaw — don’t know how much damage will be suffered by the magnetic strip.

    Investigate if it’s possible to transfer amounts to lower-rate cards. For example, is it possible to transfer the $1,000 @ 13.5% to the 9% Chase, or the $5,700 @ 9% to a third lower-rate card? I’m clueless here.

    Create a household budget to see how much money can be realistically set aside each month to pay down these 2 cards exclusively.

    As noted earlier in this thread, the effective interest rate on the Citi card is presently 5.178%. The Chase card at 9% is the significantly more expensive one and should be paid off first because of the higher interest rate. However, it should be noted that as the $3,800 @ 3% principal is paid down, the effective rate on the Citi card will increase and there will come a point when it will equal or exceed the 9% rate of the Chase card. This tipping point occurs when $3,050 of the Citi principal has been paid, i.e., when $750 @ 3% principal still exists. The equation is [(3800-X)*3+(1000)*13.5]/(4800-X)=9; solve for X. Before the tipping point is reached, the Chase is the higher-interest card. After the tipping point is crossed, the Citi is the higher-interest card.

    If $3,050 plus interest charges over several interest periods, or a substantially equal amount, can be paid on the Citi card before the 9% rate kicks in on the Chase card, I suggest paying the Citi card off completely before the Chase. The method takes advantage of the 0% interest rate on the Chase card (no payments required) to pursue the tipping point on the Citi card. Something on the order of ~$630/month for 5 months (April-August inclusive) will be needed.

    If $3,050 plus interest charges or a substantially equal amount cannot be managed, I suggest paying the required minimum on the Citi card and paying the balance of the set-aside monthly amount towards the Chase. The rationale here is the Chase card is likely to remain the higher-interest card for some time to come and as much as possible of it should be paid off first. The 0% interest for the next 5 months means every dollar you send to Chase goes directly to paying down the principal which is a pretty good deal; make the best of it. Should it ever come to pass that the tipping point is passed on the Citi card before the Chase card is paid off, then invert the payment stategy — pay the required minimum on the Chase and pay the balance of the set-aside monthly amount to the Citi — as the Citi will then be and will remain the higher-interest card until it’s paid off.

    My SWAG is several hundred to perhaps a thousand in interest charges before you’re done (depends on size of set-aside monthly amount). Good luck.

  30. Brian says:

    7million7years – The object of personal finance is to meet PERSONAL FINANCE GOALS. In the scenario presented, the person in the e-mail obviously has a goal of paying off credit cards. The request was how to tackle it based on the scenario given, not to assess the goals or to help come up with new ones to replace them.

    Encouraging someone to remain in debt, so they can go into MORE debt (financing new real-estate as you say) is irresponsible. I’m not against making money, but you can do it without debt, and there’s no question that is the BEST way to do it.

    Staying in debt adds risk to making money… a market turn can wreak havoc, and if you are in debt elsewhere as well, can wipe everything out. People up until about a year ago who were leveraging on real estate are in a rude awakening right now. It’s one thing to suffer a bad real estate market, but being in debt elsewhere on top of their real estate is a recipe for disaster.

    If you are planning on writing a book as it appears, I would offer a piece of advice – focus on listening to those talking to you first. It’s hard to answer when you didn’t really hear the question.

  31. Bill says:

    I just wanted to address the “controversy” of the Dave Ramsey plan (The Debt Snowball). As a caveat, I think it is the best plan for everyone – pay lowest balance first vice highest interest. It is interesting to me that, in a payoff plan, people get excited about interest rates. If interest expense was really a concern, the writer would not have gotten into debt to begin with. Point being, don’t let interest expense optimization lead you to planning a path that will only get you frustrated and discouraged. If it happens, as one poster noted, that the high interest debt is your largest balance, you’ll never get traction. Dave’s plan, and he admits as much, isn’t financially optimal, but emotionally optimal. At the end of the day, if you pursue the debt snowball vigorously, the actual additional cost in interest expense won’t be much.

  32. Bill says, “If interest expense was really a concern, the writer would not have gotten into debt to begin with.”

    Often interest expense isn’t a concern because the borrower doesn’t understand how much interest will cost at the time she or he is charging up loans on credit cards. Only after it’s too late and several thousand bucks have been racked up does the buyer realize that interest expense really IS a concern.

    Psychologically this is an individual matter. If the goal is to get free of debt, the person needs to think through the situation and decide which will feel like the greater accomplishment to her or him: get rid of the debt that’s costing the most, get rid of the largest debt, or build toward debt freedom by starting with the smallest debt and working through to the end of the biggest one. Only you know how your mind works, and so only you can know which will be the most effective strategy for you.

    Personally, paying interest frosts my cookies. The more interest, the deeper the frosting. I would want to get rid of the higher-interest debt first. But I certainly can appreciate the feeling of SUCCESS that would come from getting free more quickly of one or two smaller debts first. Diff’rent strokes…

  33. steve says:

    The way to answer such questions is to run a monthly payment schedule scenarios through the time that full payoff can be achieved on all debts. Do them on separate excel sheets.

    Then go for the schedule that costs you the least money.

    What matters in the end is how much money it costs you to pay off the loans.

  34. steve says:

    YOu also need to calculate the effective apr for each credit card debt month by month–the 5.94% avereged debt on the 0% card approaches 13.99 percenst as the 0% portion is paid off. This can be a clue for how to shift the majority of your funds from one debt to another, based upon which is costing you the most in interest on any given month.

    Once you have those payment shifts/scenarios worked out, then you calculate the total amount of interest paid over the term of the debt. Whichever scenario costs the least is the one that will get you out the fastest, so that’s the one to go for. From my point of view.

  35. k says:

    Our tactic: After lowering my interest rate on my Mastercard and my wife’s Visa, we cut up all store cards and gas cards and have put them high on the list of debts to eliminate first. The interest rates they charge are obscene. I’ve actually been without store and gas cards for some years now for that very reason, but my wife brought a few into the marriage, and it took me a while to convince her that they are pure evil. We are well on our way to having nothing left but one mastercard and one visa, both with great rates, that we will be paying off faster as soon as the evil store cards are ancient history

  36. no debt except houses says:

    Should I apply this method to homes I own? I a prmary resid. abd 2 invest. propertys. The break down is as follows –
    primary rate 6.5% with an equity line with a rate of 4.5%
    investment # 1 – 7.5%
    investment # 2 – 7.0%
    do the balances matter or just pay of the highest int. rate first? i have been paying off my primary 1st

  37. Dale says:

    I’m in the process of doing something similar. I had to take over the household finacnes because I learned how far out of hand they had become. I started working on the problem after learning in January of 2009 that I had a total of $60,000.00 on eight credit cards. Minimum payments on the group totaled about $1,348.00. Back then, the amount of cash available to make the payments (after paying utility bills, groceries and car insurance) was only about $300.00 per month. Still, after looking at the problem for about half an hour I theorized I could be clear of debt in about 5 years.

    I learned that the procedure being practiced was to open new card accounts and make minimum payments with borrowed money. And what’s wrong with that?? That’s the same way our government likes to handle our national finances. ((-: lol

    Today my balance is just under $11,000.00 with only two cards remaining to be paid. I calculate that I’m scheduled to pay out in mid June of 2011, that is, if I have no unexpected reversals.

    I got to this point so soon by depleting the majoority of my savings (which was about one third of the debt) and by applying some significant financial windfalls to the credit card payments as soon as those windfalls became available. The other main procedure that helped me get to my current status was to immediately quit using the cards “Cold Turkey.” Other procedures were to stop making only minimum payments after the low balance cards were paid off. I also deleted all expenses that were luxuries, like a land line telephone, expensive “junk food” snacks, most resturant meals and any other non-essential purchases, like new clothes. The computer and Internet were necessary to get work so those expenses had to remain.

    I notice the first post on this thread was April 2008 and the most recent post prior to this one was about a year ago. Some things might be a little different at this time because of changes in the law regulating credit card companies.

    I called credit card companies twice asking for lower rates. Each time the company I called took action that was harmful to my situation. I no longer call them asking for any help.

    The only advice I would offer that is different from that given in the article is to be careful how you transfer any balances to any new credit cards even if they offer zero percent introductory interest rate. There is usually a built-in fee determined by a certain pre-set percent (3% to maybe 5%) of the amount transferred to the new card. That “service fee” which costs you a lump sum which is added to the total balance on the new card can negate most of the savings gained by transferring to a new card even when the introductory rate is zero percent.

    For example, a few months ago I considered transferring $12,500.00 to a zero interest rate card. Before deciding, I calculated the interest that would be paid at the, then current rate on those last two cards I would be paying off as opposed to the transfer fee that would be charged to the new card. The difference was less than $100.00.

    I decided to continue paying the cards and the high interest rates rather than making the transfer. Mainly that was becasue for all the trouble the savings was less than $100.00 and with the new card the minimum payment would be greater than the minimum payments on the two old cards. So it was financially safer for me to keep the two cards, each having a lower minimum payment.

    That is because if there were any future emergency circumstances to deal with it would be safer for me to have the two lower required minimum payments to make than one single larger minimum payment for the new zero interest card.

    Over all the procedures recomended are sound and helpful. The devil is in the details, so do not take anything for granted. Calculate every contingency. Don;t be afraid to take some calculated risks, but don;t go crazy and entirely ddeplete emergency savings accounts.

    If you can use Excel worksheets, as I did, it is extremely helpful to see at a glance how time – money and different interest rates can work against you and for you while you use those worksheets to plot different courses of action.

Leave a Reply

Your email address will not be published. Required fields are marked *