Get Rid of Your Debt

 
 

Paying off debt in theory is easy. It’s just the execution that is hard. There’s two common approaches. The snowball approach, where you list your debts from smallest to largest and then try and knock off the small ones first so you feel all good inside and progress from there. Or the stack method where you list all your debts and then pay off the highest interest rate first.

Which method should you use? A Harvard study has shown that the snowball method works best. In their study they found that the small wins kept people reducing their debt.

So use the snowball method. You can use credit.comcreditkarma.com, etc. to get a credit report which lists all your debts. You can also use mint.com, but you have to link the debts. Then once you have a complete list (excluding your mortgage) you list them from the lowest to highest balance. Then you put all your extra debt repayment dollars on the lowest balance first and work your way down.

Example:

  • Credit card 1: 18% - $500

  • Credit card 2: 24% - $4,000

  • Car Loan: 3% - $10,000

In the example above you would continue to pay your monthly minimum on credit card #2 and pay your car loan, but all the extra money would go onto credit card #1 to get it paid off as quickly as possible. Once that’s done you head to #2 and finally the car loan.

Should you get a consolidation loan?

A consolidation loan is a loan provided by a financial institution that combines your other debt into one monthly payment. They sound great, but there’s issues with them.

1.   You still have access to your old credit cards, if you start buying again your debt will continue to balloon.

2.   There are typically fees associated with opening them.

3.   If you can pay off your existing debts quicker than the total term of the consolidation loan you may actually pay more in total interest, even if it’s at a lower rate. Paying 24% sucks, but your better paying 24% for 1 year than 8% for 5 years (you’d pay $68 vs. $108 in total interest respectively).

4.   Remember the Harvard study we mentioned? They found that it was the portion of the debt reduction was important to people. So if you pay off $100 of a $500 credit card you feel great. But if you pay off $100 on a $14,500 consolidated loan you don’t feel as good.

Don’t get a consolidation loan.

Should you transfer a balance to a new credit card?

Another option is to transfer a balance to a new credit card that offers a low or 0% interest rate for a period of time, put your other ones in ice in your freezer so you don’t use them, but keep your credit card history. Often these credit cards will charge a small percentage for balances transferred, but it should be in the 3% range so you’ll come out ahead.

Discover has one that is highly rated with 21 months of 0% balances on transferred money and a 3% charge to transfer.

But the problem is the same as the consolidation loan. Now you have one big loan and the other credit cards are open for business again.

Don’t transfer the balance to a new credit card! Just get busy paying down that debt.

You just need to realize that no one deserves anything. We don’t deserve new clothes, a car, dinners out, drinks with friends. Nothing. If you can’t afford it. You can’t buy it. If you have credit card debt, you can't afford it.

 
 
Do not pray for easy lives. But to be stronger men
— John F. Kennedy

Try putting a piece of paper on the floor by your bedroom door that reads “buy nothing.” You’ll walk by it every day as a reminder.