My wife and I have found ourselves deep in consumer debt, all kinds of it, for a few years now. We started with student loans. Then, in an effort to boost our credit to buy a home, we added 2 credit cards and a car loan. That’s what you do to build credit, isn’t it? 5 years later we currently have those student loans, a mortgage, 2 car loans, a debt consolidation loan, and 10 credit card balances of varying amounts. We’re done with it. No more consumer debt for us, this is all getting paid off, and we’re moving toward Financial Independence. We want to get there before age 60. The goal is set for me to be 57 and my wife 55 when we hit F.I. We’re currently 38 and 36 respectively.
I wish we’d found Financial Independence information sooner, but with the debt we need to tackle, and then starting our savings from basically scratch, I think age 57/55 is my best guess on a good timeframe goal to get there. We want to have our credit cards paid off in the next three years, and then the cars and consolidation loan within 5. We have a $1000 emergency fund (thanks Dave Ramsey!) We always keep $500-$1000 extra in the checking, and my wife has about 5k in a traditional IRA rolled over from a 457 when she changed jobs. I have a few hundred in 401k from my current job, but I just stopped contributing to up cash flow to hit these debts as hard and fast as possible, with plans to start contributing again as soon as the credit cards are paid off. My employer contributes 3% of my pay every year whether I contribute anything or not, so I’m not completely stopping contributions, just the part I could use to pay off debt.
You’re probably wondering why I’m sharing all of this information, well there’s a reason for the season.
I thanked Dave Ramsey back there, but he got something wrong in his baby steps, at least wrong for us. What we’re going to do is going to be a lot more work, and take more discipline, but we’ll get out of debt a lot faster than his baby steps would have allowed following them to the letter. I haven’t seen anyone else talking about this, is it possible I discovered a brand new get out of debt hack? Please, if you find any glaring flaws in my plan, or even just a minute detail out of place, say so. Feel free to email, discuss in the comments, etc. Tell me where I’m wrong. Tell me if you love it! But I feel I’ve found a solid credit card hack to make paying them off a LOT faster.
Step 1: List all of your cards, their balances, their minimum payments, and their interest rates. Also, look at your latest statements and figure out what your actual interest payment on each card is with its current balance. Lastly, you’ll need all of your payment due dates. The easiest way to list these out and be able to edit is a spreadsheet. You could also use a lined chart in a word processing program, and of course you could do it by hand. I would recommend the spreadsheet for ease of editing once you get started, and portability using google drive etc, so you don’t always have to be in front of your computer to view.
Step 2: Take it all in. If you’ve never had all of this information in one place before, it can be a bit overwhelming. Give it a good look, take a deep breath, and let your heart slow down a few beats. Now you’re ready to start planning.
Step 3: Plan your payoff strategy. I’m not going to tell you how you should plan yours, everyone’s situation is different, with so many different cards, rates, balances, loans, liabilities.
Dave says cut up your cards and never use them again. You then start with your smallest balance, pay minimums on the rest, and throw everything you can at that smallest one. Pay it off quick, and then apply everything you were throwing at it, plus the minimum balance you were paying on the next smallest one at it, so on until you’ve conquered your mountain. This is the snowball method. Most people who’ve looked into paying off debt have heard of this method. I like it, it gives you some quick wins and hopefully motivation to keep going.
Another method is the avalanche. You find your highest interest rate debt and throw everything you can at it while making minimum payments on the others. Knocking off the higher interest rates first will save you money over the debt snowball, but you could be tackling bigger debts first, and it may take a while to get that first win. It can make you feel like you’re not making any progress for a while, and you’ll need some discipline and perseverance to stick with this plan.
Some people prefer a hybrid of the above two plans. You start with a small balance and get that first win, then hit your higher interest. You can bounce back and forth between quick win and higher interest cards when you’re ready to move on to the next one, or you stick with the avalanche, but this way you get that first win or two out of the way and some momentum.
Now while these strategies are the basis for what we’ll be doing, they’re far inferior. With Dave’s strategy you have cut up your cards and can’t create more debt with them, that’s true, but you can’t harness their rules, power, or rewards either. What if you could make those cards work as hard at paying off your debt as you are?
For simplicity’s sake, lets pretend we have three card balances to pay off. One has a $5000 balance, 19% interest rate, and $100 minimum payment. One has a $2000 balance, 15% interest rate, and $50 minimum payment. The last one has a $700 balance, 17% interest rate, and $30 minimum payment. If you follow the snowball it’s easy to see you pay off the $700, the $2000, and then the $5000. The avalanche would say that’s crazy! You’ll save more money in the long run hitting that $5000 first because it has the highest interest rate, and then move on to the $700 with the next highest, and then finally the $2000 with the lowest interest rate. I say both ways can work, and like a mix of both, but with a kicker, I’m going to make the cards work for me.
What I’m going to do is drastically lower, or eliminate the minimum payments, freeing up more cash to throw at the balance I want to tackle. Personally, I still like to pay off the little ones before tackling higher balances, but once we’re down to several with high balances, then I’ll avalanche them. This will start off like the base of a snowman rolling downhill, instead of a little Charlie Brown sized snowball.
Of course you’re wondering, how in the heck do you reduce or eliminate your minimum payments? Well, the trick is in the wording itself. Those are minimum payments due for the month. If you pay at least that, you don’t HAVE to pay any more, but you can. Minimums also are mostly paying interest, but a little goes toward the balance.
If you listen to people who are good with credit, you would know that you can give yourself a 1% or better raise on all of your money that goes toward expenses each year, just by using a rewards card to pay for those expenses, and then pay it off each month. You’re not out any extra cash, no interest is charged, but you make a cashback bonus for every dollar that was temporarily paid for with the card. It’s beautiful if you’re disciplined enough to not carry a balance. We’re going to employ a little bit of this strategy, but with cards that already have a balance.
Lets start with that $700 balance card, and say it has a $1000 limit. That means we could theoretically put another $300 on it before it was maxed out. Let’s use it for the grocery store this week and throw $100 on it. Since this is money we would have spent anyway on groceries, we can immediately make a payment and pay the groceries off. We just paid $100 on our card, this means we no longer have to make a minimum payment!!!! But if we don’t want the balance to increase, we’ll have to at least pay the interest on the $700 balance we started with. 17% interest divided by 12 months = about 1.42% interest per month on the carried over balance, so the interest charge will be about $9.94. Now before our payment date we make another payment of $9.94, or we just add it to the $100 grocery payment and pay a total of $109.94. When the month rolls over, we have the same $700 balance that we had last month but we saved $20.06 in minimum payment we didn’t have to make ($30 minus the interest payment.) This doesn’t pay off the balance at all, but it prevents it from increasing, and it increases cashflow!
If we employ this method with each card so that we’re just keeping the balances the same, we would spend $100 in groceries on the $2000 balance card the next week, immediately pay off the $100, and then need to make our interest payment or add it to the $100. Interest would be 15% divided by 12 months = 1.25% multiplied by the $2000 balance = $25! Again, our payment requirement is met if we pay $125 total, the card balance won’t increase, and we just shaved $25 off our minimum payment. So far, we’ve saved $45.06 in minimum payments between our 2 cards.
For the third card it has a 19% APR, divided by 12 = about 1.59% per month, multiplied by the $5000 balance = an interest charge of $79.50. So we spend our $100 on that card as well the following week for groceries. We pay off the groceries immediately. We pay another $79.50 to match the interest charge. We’ve met our minimum payment for the month, paid the interest to keep the balance from increasing, and again saved $20.50 on this minimum payment.
What we’ve done is created cash flow that we didn’t have if we were paying the minimum required each month, a total of $65.56 between the three cards. This is the hack I was talking about. Lets pretend that with Dave Ramsey’s snowball method we had $100 extra on top of minimums to throw toward a debt each month. That would mean we would start the snowball with $130 each month toward the $700, and we’d finish paying it off in 6 months according to bankrate.com’s payoff calculator. If we used my method instead, we’d be able to throw another $100 + $9.94 interest + $20.06 saved from the first card, + $25 saved from the second card, + $20.50 saved from the third card on minimums each month at that balance, for a total of $175.50, 5 months to payoff.
With the snowball method we would move on to the $2000 starting balance card, but we got our first win, so I want to avalanche from here out. This means I’m moving to the $5000 balance, which hasn’t changed because we’ve been paying the interest. We can throw $175.50 + $79.50 that we were paying in interest at it each month for a total of $255. 24 months to payoff.
Now we move to the $2000 balance. We throw the $255 + $25 we were paying in interest at it for a total of $280 per month. Paid off in 8 months. All three cards are paid off in a total of 37 months.
With Dave’s snowball, and you can do these calculations yourself on bankrate.com, 6 months for card 1, 13 months for card 2, and 22 months to pay off card 3, for a total of 41 months. Now, you’d be making slight progress on those higher cards by paying the minimums each month, and you’d cut your balances slightly when you got to them in sequence, but it still comes out to a longer payoff timeframe, and more interest paid.
Now it’s nice to see that we could potentially have some more cash flow to throw at balances, and that it could conceivably pay them off a little bit quicker, but what happens if we employ some of the options and rewards that credit cards can offer us? You probably already have a card that offers rewards, generally around 1% cash back is standard, it may be tiered for the kind of purchase as well. For instance my Discover card offers quarterly categories where I can earn 5% cash back on certain kinds of purchases, like gas or groceries. Let’s use those rewards to pay on the cards as well!
For the first card, we put $100 on it for 5 months, or $500. At 1% rewards we’ve earned $5, apply it to the balance in the last payoff month, and that’s $5 we saved that we can put toward the next card.
On the second card if it has the same kind of rewards, we’ve earned $5 from the 5 months of the first card, and then we’ll put another $2400 on the card in purchases, for $24 in rewards, a total of $29 that we can put on the balance the last month toward payoff that didn’t come out of our pocket.
On the third card we’ll have that $29 plus another $800 spent for $8 in rewards, $37 total that we can put toward that balance. Just by using the reward on these three cards to pay themselves off, we saved $5 on card 1, $29 on card 2, and $37 on card 3, $71 total we get to keep simply because we smartly used our cards and rewards. Now you just worked hard, take that $71 and go out to dinner to celebrate. Put it on your newly paid off card with the best rewards, and pay it off right away! Those rewards will add up for you from now on, even when you don’t carry the balance! You can use them to pay for birthday presents, or date night, and not have them come out of your pocket any more. If you pay off your balance responsibly each month, but rack up those rewards by putting your everyday purchases on your card with the best rewards, you’ve effectively given yourself a raise of the reward % on every dollar you spend. These rewards helped pay off the balance on the card, and they’ll help you going forward. This is a basic scenario, I’ve earned a lot more rewards by using the best % option for as many everyday purchases as I can, utilities, gasoline, groceries, etc…
Rewards are just one of the tools available through our cards. We also have balance transfers. A normal balance transfer fee is usually about 3% of the total balance that you move from one card to another, however, you will see offers from new cards, or even from old ones that you’ve paid down and want more of your business, to transfer balances for lower, even 0% fees. These usually offer an introductory rate of 9 to 18 months that the balance can sit there with 0% interest as well!
Lets say we are able to sign up for a card that will let us move our biggest balance we discussed, the $5000 one, to a 0% rate for 12 months, and for simplicity sake, a 0% transfer fee. This new card would still have a minimum payment, but if we follow my method of creating cashflow instead of paying the minimum, we don’t have an interest payment for the first 12 months! We’ll assume it’s the same interest rate after those 12 months, but we’ve freed up another $79.50 each month for 12 months to throw at the other 2 cards!
Card 1, $175.50 + $79.50 saved from the balance transfer, paid off in 3 months. Card 2 for payoff would become the $2000 card because it’s the one with interest now. $175.50 + $25 interest payment, + $79.50 saved from card 3 interest, we pay a total of $280 per month, it’s paid off in 8 months. So by balance transferring the $5000 and saving those interest payments to put toward the other 2 cards, we’ve cut 2 months off the payoff time for those 2 cards, paid them both off in 12 months before interest starts on the higher balance, and now have $280 per month to throw at the $5000 instead of the $255 from the original avalanche method. Paying $280 per month, this card is paid off in 22 months, again 2 months quicker. We’ve cut 4 months off our payoff timeframe and hundreds of dollars in interest.
You’ll need to evaluate your own balance transfer offers, or seek them out, to see if this makes sense for your situation, but it certainly can for many people! Between paying toward our card with rewards earned, and balance transfers, we’ve saved hundreds if not thousands of dollars depending on cards and balances, and the rewards earned.
The last option I’ll discuss for making cards work for you is the introductory offer. Many cards will offer a bonus, or a cashback bonus, or extra points, if you spend so much on the card in a certain time frame. For instance, I was just looking at one that you can earn $300 if you spend $3000 in the first three months on the card. If you’re doing this responsibly, you’ve just earned $300 for buying your everyday expenses, and it never cost you an extra dime. Sometimes those will be the same cards that offer a balance transfer special! If you can transfer your balance, and earn a bonus, you’ve just paid your cards off that much quicker, because you can apply the bonus to the balance! In our previous scenario, using this cards’ offer would cut another whole month off of our payments. But even if you can’t transfer your balance to a card offering a bonus, the bonus may still be worth getting the card! If you can responsibly earn the bonus, you can then use the bonus toward every day expenses, and put the money you would have spent toward one of the card balances!
It will take planning, and research, and discipline, but these methods can help you pay off your balances much quicker, and save you a ton of money. Dave’s plan may be right for you if you don’t have the discipline to control your spending and pay your cards correctly, but if you’re frustrated enough to have read through this entire post, I believe in you. Let me know what you think.