104: Other People’s Money

We as a population don’t pay off our creditors in full every month, opting instead to make minimum payments or just shifting your balances around – paying ridiculous amounts of interest for the privilege. For our generation, spending money is entirely painless. We swipe our bank or credit card, and get whatever it is we want – immediate gratification.  Not only do we spend everything we make, we spend BEYOND our means – and backfill our income with credit. We use the amounts on our credit cards, loans and lines of credit like it’s our own money.

But guess what – it’s NOT our money.

It’s Other People’s Money.

It’s time for this trend to end.

First and foremost, if your credit card spending is out of control, you need to take away the cards that are making it all possible. Put your cards on ice.

With multiple creditors on your plate, getting them all paid off can seem like an overwhelming task. The reason we feel like we’re not making any impact on our debt is because we spread our debt repayment money too thin. Luckily, there IS a strategy towards debt repayment that actually works! It’s called the “DEAD ON LAST PAYMENT” approach. Check this out.

Make a summary of all your debt and, rank all your creditors by their annual percentage rate (APR) from highest to lowest. Example:

Creditor                              Balance                              APR                                      Min. Payment

Credit Card X                   $2,367.89                         28.99%                               $30.00

Credit Card Y                   $3856.43                          19.99%                                $45.00

Credit Card Z                   $1,234.56                          19.98%                                $20.00

Line of Credit                   $5,000.00                         9.00%                                 $50.00

Student Loan                   $18,673.45                        6.45%                                  $75.00

Parents                                $500.00                            0.00%                                 $0.00

After completing your budget, you decided that you can put $1,000 per month towards debt repayment. Pay the minimums on all of your debts except the most expensive one. In the example above, $190.00 goes towards minimum payments and the remaining $810.00 goes to “Credit Card X”. In four months when that card is paid off, it’s considered “DEAD.” The $845 you were paying now gets rolled into the next most expensive debt payments. Now you’re making payments of $855.00 ($810.00 + $45.00). That debt will be cleared in 5 months. Once that debt is “DEAD,” simply roll your payment amount into the next debt, and so forth until all your debts are cleared. This process is the most efficient way to blaze through your debt while maintaining a sparking credit history. Once you’re out of debt, STAY THAT WAY!

You can (and should) take this strategy a step further by ensuring as much of your money goes towards the PRINCIPLE on your loans (“principle” is the money you owe before interest). Here’s how:

1. Call your credit card companies and ask to have your interest rate lowered. The first customer service rep you call won’t likely have the clearance to lower your rate for you so ask to speak with someone who can.
2. Consolidate – I’m not an advocate for shifting your debt around, but if you have (or qualify for) a line of credit with a lower interest rate than your credit cards, consider putting the balances on your line of credit. If you do this, don’t go racking up more debt on your credit cards. CAUTION: You should always pay attention to the limits on your credit accounts. Owing a large amount of your total credit allowance sends warning bells to Equifax and could negatively impact your credit score.
3. Revisit and trim your budget. Challenge yourself to live on less and pump as much money into your debt repayment as you comfortably can (do not sacrifice your long-term savings).
4. Make extra money – even if it’s just a few hundred dollars every month, that money will go a long way to getting you out of debt faster.