Note: There is nothing revolutionary in this post, just good, solid information that will help those of you living with debt. If you aren’t living with debt, then this is not for you.
The average American household has over $15,000 in credit card debt.
I’ll let that sink in for a second.
We want to get that number trending toward $0.
But how in the world do you get the debt under control? It’s a self-feeding problem, and for most people, it’s a problem they’ll never truly solve. This means that we have an entire generation that will be going into retirement with gobs of credit card debt. Not for Padorec readers – we take control of our lives, which means man-handling our debt, too.
So, how is it done? Like any good solution, it’s a 3 step process.
The Debt Control Planning Process
- Write down your debt
- Highest = First, Lowest = Last
- Start paying it off
The whole process is a bit more complicated than that…but not much.
1. Write Down Your Debt
The first step to controlling your debt is to understand what exactly your debt is. So take out a sheet of paper and a pen.
Next, write down all of your debt, and what the interest rate on that debt is. It might look something like this
So here we have a total of $205,217 in debt, but at very different interest rates.
Step 1 is complete!!! Now let’s do something with the list
2. Highest = First, Lowest = Last
Now that we have our list, we need to figure out where to focus our efforts. We must follow two rules.
- We always pay at least the minimum balance due on every card
- Any extra money we have goes towards the highest interest rate debt
So, in the example above: Let’s say we have about $45 per month left over each month after we pay all of the minimum balances. That leftover $45 goes toward our highest interest debt – in this case, that would be our Bank of America Credit Card.
Once the BOA credit card is paid off, then we start focusing our extra funds on the next highest interest rate. In this case, that’s the Delta American Express Card, at 14.4%
If you haven’t figured it out on your own, the reason we focus on the high interest rate cards is to minimize the amount of money spent on interest. Each month, interest is added to your balance based on your outstanding debt. A 15% interest rate means that for every $1 in debt, you pay an extra $0.15. But with a 4.4% interest rate, for every $1 in debt, you pay an extra $0.044.
Higher Interest = Higher Cost. We get rid of high interest debt first in order to save money.
3. Start Paying it Off
Now we get to the most important step in the process – paying off your debt. This is where all of the hard work of steps 1 and 2 really start to…pay off. (Pun absolutely intended) Once again, there are two steps.
- Set up automatic monthly payments for every card which pays off the minimum payment due every single month. That way you don’t have to deal with late fees or the hassle of making the actual payment manually. It’s all automatic.
- At the end of each month, take the money you have left over and apply it to your highest interest debt. Set a reminder on your phone to go off each month so you don’t forget.
It’s as simple as that.
How Much Should You Pay?
The obvious answer is: “As much as you can afford”. When you pay off credit card debt that is costing 15%, you are basically earning money.By paying off $100 of debt that would have charged 15% interest, you’ve essentially just made $15. That’s totally worth it, and more than you would have made by having your money in the bank.
By following that logic, it makes more sense to put your money toward paying off debt than putting it in a savings account. The obvious exception being that you do still need to have some sort of emergency buffer to cover emergencies. Beyond the emergency money, though, you should be putting everything toward paying off high interest debt.
CNN Money has created a handy calculator you can use to figure out how long it will take to pay off your credit card debt.
Within the CNN calculator, you can also choose a time frame, and it will tell you how much money to pay off every month to pay it off in that amount of time.
So you could enter “six months”, and it will tell you how much you need to pay every month to pay it all off in six months.
Taking it off, and Keeping it off
Once you have paid off your debt, it’s time to work on keeping yourself from accumulating new debt! While there are some “needs” that we have to accumulate debt to afford, you should avoid those “wants” (like fancy new shoes, a new car, gaming systems, etc).
If you choose to use credit cards for everyday spend (the rewards can be great) just make sure you pay off your balance in full every single month.
Still have Questions?
Then e-mail me. I answer every single e-mail, and I’m happy to provide help and guidance for you, just like I have for many others.
e-mail Paul: Paul@Padorec.com