By ROBERT K. CUNNINGHAM, Personal Finance Coach
RIGHT OUT OF THE GATE: This blog/website and all its content is designed and produced for information purposes only. No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made. The reader assumes any and all risk for strategies which are acted on.
For many people, the prospect of paying off all of their unsecured debts – and for most, this refers to their credit cards and department store cards – are remote in the short term, and daunting regardless of the circumstances.
But truthfully, it doesn’t have to be a difficult task… provided you’re fully committed to the process.
Today’s post will lay out the steps for the quickest, most painless strategies pertaining to paying off debt. To be clear, we’re not referring to a mortgage if you’re buying your home rather than renting, and we’re also not including automobile financing… although the reality is that if your credit card and other unsecured balances are manageable, you could choose to include your car loan in the system and get it paid off as well.
For our purposes, however, we are focusing on high-interest debt. Credit cards typically charge 20% or more annually. Nothing short-circuits your ability to get ahead financially… and BuildWealthEarly… than high-interest debt compounding monthly.
So let’s get to what you specifically need to do:
1) List all your debts in chronological order by minimum payment due date. The order in which you list your debts is your choice, of course, but I have found this particular method to be the easiest. What is most important is to be sure the following information is included: Creditor, account number, phone number and/or website address ( have your user name and password available), balance, APR ( annual percentage rate), minimum payment due, and due date for monthly payments.
Be sure this information is accurate, to the hundredth of a percent with regards to the APR. I am about to explain why this is important.
2) For any creditors charging more than 12% interest, call and ask for a reduction. Yep… if you want this system to work at peak efficiency and effectiveness, you should be willing to call and talk to a human. The purpose of your call is simple, and should start with something along the lines of: “Hi, I am re-dedicating myself to getting my debts paid off, in full and in the shortest amount of time possible, and I’d like to request that you reduce my interest rate, which is currently at ____ (tell them specifically what it is).”
You want to be ultra-specific on the rate because it will assert that you’re serious about this endeavor. Informing the company’s representative that your interest rate “is around 20% or so,” makes you come off as hap-hazard about the whole thing. Furthermore, be prepared to ask for a specific figure if requested to do so. “If you could see your way clear to suspend my interest entirely for the next six months, that would be greatly appreciated and will really assist me in getting my debt paid down.”
If that doesn’t fly, don’t be deterred: “I understand that you can’t eliminate my interest entirely. How about cutting it in half, then?”
NOTE: You can attempt this communication via online chat, rather than by phone, but chat representatives often seem to have the least amount of authority. In my opinion, you’re better off calling.
If you successfully achieve a reduction — and your chances at doing so are actually very good depending on the current rate — don’t push your luck by asking for more of a discount unless the awarded reduction is truly meager. Anything that, say, represents a reduction of 25% or more (for instance, if your current rate of 20% is reduced to 15% or less) should be accepted on its face with gratitude expressed.
If you run into a rep who refuses any accommodation (reminds me of the film ‘The Godfather,’ when Vito Corleone asks the other Dons, “when have I ever refused an accommodation?”), ask to speak to a supervisor, and go through the same steps until success is achieved, or until they hang up on you (kidding).
3) Update your list’s APRs, and note the debt with the highest rate. This will be your first priority debt. NOTE: If you have two debts with the same APR, and one balance is significantly lower than the other, go with the lower balance debt first… but ONLY if the rates are identical, or virtually the same.
As many financial “gurus” have explained by calling this the “snowball” method, the trick is to dedicate all extra funds that you are setting aside for debt elimination to the designated priority debt, until it is paid in full. You should have arrived at this amount of available extra funds by going through the first three steps of the “Six-Steps-to-Six-Figures” that have been laid out in this blog over the past month.
4) After determining your first priority debt, dedicate all that you can to it. Here’s what you do: Note the minimum payment due on your designated priority date, and add your total of extra available funds for debt elimination to this amount. Don’t pay the extra funds total in lieu of the minimum, but instead pay it in addition to the minimum. And pay it right now… even if the minimum payment isn’t due for another three weeks, or if you just sent the minimum payment in last week.
For all of the rest of your creditors on your list, pay the minimum payment. Although it’s preferable to simply pay them all simultaneously right after sending money to the creditor for the primary debt, it isn’t crucial as long as you make each payment at least 3-5 days before it is due. DON’T BE TEMPTED TO IGNORE ANY OF THE OTHER CREDITORS, THINKING YOU WILL EVENTUALLY BE ACCELERATING THEIR PAY-OFF. There’s no reason to muck up your credit… just pay the minimums on time and let the system as it’s laid out here do its thing.
Regularly monitor the updated balance of your priority debt and when it falls below the amount you’ve been sending in on that debt, it’s time for an adjustment. First, pay the full balance due on the primary debt but obviously not more than that. Assuming this final payment is less than what you’ve been sending to this creditor, be sure to add the difference to the payment for your next priority debt.
To determine that next debt to attack, go back to your list and select the account with the second-highest APR.
Now this next step is important… send the following amount to the second creditor as soon as possible, but most certainly before the next payment is due: Amount of total payment that was being sent to the first primary debt (plus the reduced difference in the last payment, as noted above), PLUS the minimum payment due on the second (new) primary debt.
The idea is to continue sending out the same amount of money every month while your debt slowly dwindles. As it decreases, the amount you’re sending becomes more and more effective, and accelerates the pay-off process. Thus, the term “snowball.”
5) Follow the same routine, in order of highest to lowest APRs, until your last remaining account is paid in full. As each account is paid in full, just keep adding the previous total payment to the minimum payment of the new target debt. If you stick with this system to its conclusion, it is impossible to fail.
NOTE: An alternative to the above method which uses the APR to determine the order of accounts being paid off is to instead pay the smallest balance first, then next smallest, etc., regardless of APR. The theory is that doing it this way will give you tangible results (i.e. zero balances) more quickly, and ultimately better encourage you to stick it out to the end. The problem is that this approach will result in you paying more interest over the length of your debt-elimination trek. For my money, I want to save every dollar available. The math means more to me than the mental tomfoolery.
Ultimately, you will have earned a hearty congrats for paying off all your unsecured debt. Just one last reminder: Do NOT be a schmuck and run up more debt. There’s a smart way to use credit cards, to gain access to some sweet rewards without going into more debt, and for that information please furnish your email address for a free report with the details.
In the meantime, thanks again for reading.
For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know that you were referred to that site via www.buildwealthearly.com.
DISCLOSURE: If you opt to purchase a product(s) from www.spwealthadvisors.com, I will qualify for an affiliate commission.