6 Steps to Eliminating Your Debt Painlessly

By Nora Dunn. Last updated 7 April 2010. 25 comments
Photo: Nora Dunn

Eliminating Debt Painlessly. Rarely do you see these words fit together in a neat little sentence. The very act of putting your hard earned money towards the stack of debts you've accrued is painful. The good news is you can snowball your progress against mounting debts if you do it the right way.

Let's say you are juggling a number of debts, from student loans to credit cards to that loan your parents don't expect to ever see repaid but won't let you forget about either.

1. First things first: Write down each debt vehicle you have, the amount of the debt, and the rate of interest being charged. Department store cards are inevitably the worst culprits, charging interest rates that border on criminal. Next in line are usually the credit cards, student loans, then lines of credit, and your parents (unfortunately) usually come last.

EXAMPLE:

Balance Owing Interest

Sears $500 28%

Visa $2,000 18%

MC $1,000 16%

Student Loan $6,000 10%

Line of Credit $5,000 8%

Mum & Dad $1,500 0%

2. Next: Determine how much money you have available each month to put towards all your debts. If you're like most people on a tight budget you probably haphazardly throw the minimum payment plus a bit at each debt every month, hoping that eventually it will all magically disappear. Unfortunately, making minimum payments on most credit cards is a sentence to upwards of 15 years of paying off that debt, and paying at least double the original balance in interest only.

EXAMPLE:

Balance Owing Interest Min Pymt

Sears $500 28% $16

Visa $2,000 18% $66

MC $1,000 16% $25

Student Loan $6,000 10% $150

Line of Credit $5,000 8% $90

Mum & Dad $1,500 0% $0

TOTAL: $16,000 $347

Total amount you can put towards your debt each month: $450

3. Choose the highest interest debt on your list. (I don't care if it's the highest or lowest balance, just look at the interest rate). With the money you have designated towards all your debts, make ONLY minimum payments on all your debts, except your chosen highest interest debt, to which you put all the rest of your monthly allocation. Hopefully this is fair bit more than the minimum payment.

EXAMPLE:

Pay your extra $103/month to your Sears card in addition to the minimum payment, totalling $119/month.

4. Continue until your first debt is paid off. Now, you have one less debt to juggle each month. Yay! It may have taken a while to get here, but now you can cut up one card. No really. Cut it up. (Especially if it's a department store card. They're pure evil). The reason you got in this place to begin with is that you had too many cards, so let's reduce the number you have.

EXAMPLE:

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

Sears is paid off in 5 months. Card is destroyed.

5. Choose the next highest interest debt on your list. Repeat the same process as in steps three and four. You'll notice now, though, that you have more money to contribute towards your next debt of choice, since you now have one less debt payment nagging at your pocketbook.

EXAMPLE:

Visa is next. Now have an extra $119/month since the Sears card is paid off, in addition to the minimum Visa payment. Your total Visa payments are now $185.

6. And so on. Each time you systematically pay off one of your debts, you'll have more and more money to pay off the next debt on your list, effectively snowballing the process of paying off your debts. It picks up momentum quickly, and by the end you're blasting through your debts and even your parents get paid.

EXAMPLE:

After the Visa is paid off, you have $210/month for your Mastercard.

After the Mastercard is paid off, you have $360 for your Student Loan.

After the Student Loan is paid off, you have the full $450 for your Line of Credit.

After that, pay off your parents! It will only take you three months, and will get you in their good books for sure.

The total amount of time required to pay off this laundry list of debts: Under 5 years.

This is a long time, but think of it this way: Now you're Debt Free! You didn't have to toil every month over how much extra cash you can throw at the never-ending debt load, and you minimized every single dollar of interest you possibly could.

The trick is, you need to continue to allocate the same amount of money (or more) towards your overall debt every month until all your debts are paid off. If after tackling one or two cards you decide you can decrease your monthly allocation towards your debts, you'll only prolong the process and end up paying a ton of interest. A little bit of short term pain makes for lots of long term gain. You deserve it!

CAVEAT: There are other debt elimination plans that would have you pay off the lowest balance first, instead of the highest interest debt. The reason for this is the feeling of satisfaction you get from knocking off a debt from the pile, even though you may be doling out more interest dollars on a higher balance elsewhere.

The wrong person without enough dedication to the plan outlined in this article might give up if the first few debts were slow to be paid off (for example, if your Sears card had the $6,000 balance, it would take you over 3 years just to pay off your first debt. That's a long time to wait for tangible progress, even if it is the most efficient).

So take a look at your debts and ask yourself if you have the discipline to stick to the high interest plan. If not, try paying off a few smaller debts to get your legs under you and then re-evaluate. It's a personal choice - not all money matters are pure dollars and cents (I mean - sense).

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture
Christian

Thanks - this helps a lot. I've been coming up with the same plan myself, and this is a great way of finishing up the plan.

I recently paid off a few small debts and got a - literally - cheap thrill ;), I then checked the interest rates on my debts. Wow! My major credit card is running at 32%. Luckily I have some money coming in soon so I'll be throwing cash at that debt, which will (if the plan works) turn my monthly income around so I'll be cash positive, and I'll to continue to pay it down then work on the other smaller debts which also have much lower interest rates. (So I guess I'm lucky for this plan - the size of my debts correlates with the size the interest rates).

My only problem in the past has been allowing myself to "carry" about 10% of any credit line. Which I now realize to be, uh, misguided ;)

Guest's picture
Guest

With this plan, you're going to end up paying a total of $27,000 on a debt of $16,000. If you just take out a personal loan for the entire amount, you can pay it off in 3 years instead of 5, and save yourself quite a bit of interest in the process.

Guest's picture
Guest

These debt roll-up plans address a problem that no personal loan or other "house-cleaning" line of credit will fix. The problem here is overspending, not the inaccessibility of loans. Surely, there are several versions of these plans and some will cost more than others (e.g., targeting high interest rates vs. smaller balances first).

But the point here is to help reinvigorate fiscal discipline in a way that is personally rewarding and effective. Personally, I've found this strategy of rolling up debts to be unbelieveably effective. In a period of a couple of years, my wife and I went from 6 or 7 credit accounts and thousands in debt to holding only two loans -- a mortgage and a car loan. We were working on the latter -- at which point we'd have scaled our plan way back -- when we sold a house for a large profit, paid off the car, and moved to another home that fit our needs better. The interest rate we got was very low. Why? Because we'd spent the previous couple of years cleaning our financial house by reducing our debts in a disciplined, consistent manner. These plans can help.

This approach may not work for everyone. But I'm telling you, it is effective because it targets the real issues. Best of all, it is empowering. Try it. And start with lower balances if you think you'll need an early and strong reinforcement to keep going. Else, target your higher interest debts.

Julie Rains's picture

I've read money management articles that have financial planners advising clients to pay off credit card balances using special rates. I would call these teaser rates, which sometimes they are, but there are also offers that are good until the balance is paid; with the caveat being if you are late on any loan (not just the one owed to the credit card company offering the great rate) then your rate can get switched to a higher rate, something like 32%. I get these offers quite a bit though I don't know if the person with mounds of credit card debt gets them. What is your take on using this approach to digging out of the credit card hole?

Guest's picture
RxMadness

I'm not sure how well this may work for others, but one method I've found particularly helpful in conjunction with the above 6-step plan is taking advantage of balance transfer options and "specials" from your current creditors. I had followed the above steps for 5 months and completely paid off my highest interest creditor (BoA @ 22%). One month after I had started paying the next highest creditor (Citi 12%), BoA sent me a 1 year 0% balance transfer offer. The 3% balance transfer fee was the equivalent of 3 months of interest on the CitiCard which would have taken 6-7 months to clear continuing the same payment. Taking advantage of the offer allowed me to pay off the Citi card in 1 month and remove interest charges from any of the remaining debt. I am still paying off the BoA card currently, but having it at 0% allows me to make smaller, less painful, yet steadily progressive payments without gaining interest charges.

Myscha Theriault's picture

If you have debt, or would like to use credit for a "no interest loan", then I think balance transfers are great. Some of the offers even waive the transfer fee. Can't get better than that.

We've used this strategy before when there are large chunks of money we know are coming in within the next few months. For example if within a six week period we are expecting a large tax refund, the interest balance on a CD to come due and a large ticket item (like an old car) to sell, we've used this strategy even if we already have the necessary money in the bank to get maximum interest earned on our funds. If you know what date towards the end of the month your credit card company rolls your statement over, you can even get two statements before the funds are due rather than just one. Pretty slick for large ticket items that you'd rather be able to earn great short term CD rates on. This takes discipline, though.

Interesting post.

Nora Dunn's picture

Hi all! Thanks for the comments.

The rub about financial matters is that there is so much more to managing your money than what appears on paper.

Sure, taking out a personal "consolidation" loan to cover off all your credit cards and (hopefully) take advantage of a lower interest rate MIGHT work, but: 1 - If you're up to your neck in debt you may not even qualify, and 2 - the intangible. I once suggested that a client of mine consolidate her debts since she had a stable income and all the signs pointed towards "go"....and she replied that if she only had one debt to repay, she'd probably go out and buy a new Thunderbird! Something happens psychologically to some people, and the worst offenders for getting themselves into an even bigger pickle are those who consolidate their debts then rack up the credit cards again.

Balance transfers often fall under the same category. Nine times out of ten they are superb and on paper, they're the way to go. The trick is you still need to pay off those debts, and ideally you should be just as aggressive with a 0% interest debt than you would be with a 32% interest debt.

Know thyself, and manage thy debts accordingly!

Guest's picture
Guest

I'm just wondering your thoughts about services like Bud Hibbs. There are others like it too. They help you by supposedly getting the creditors to erase the debt. Too good to be true??? I hope not.

Nora Dunn's picture

I don't specifically know much about Bud Hibbs, but when I did a search on him, for almost every credible site I found, another one was claiming him as a rip off.

Anything that seems too good to be true probably has a catch in there somewhere. Go ahead and check it out, but triple check the fine print and watch your back.

If you do decide to see what it's all about, write back and let us know what you found!

Guest's picture
Barbara

I was told by a creditor one time that the higher number of active credit accounts you have, the lower your credit score is. If you can pay off debts on some of your cards (ie: department stores) and are planning on cutting them up anyways, you should go ahead and cancel the account too, because if you don't it will continue to affect your score. Plus, until you cancel the account, you keep getting coupons, etc in the mail, which makes it easier to want to go out and spend money again.

Guest's picture
Guest

You should never close an account on your own, doing so will effect your credit even more. If you don't use the account for a long period of time, then it will close by itself, which doesn't effect your credit score. As long as your balance shows 0, then your in the clear.

Guest's picture
madmadmad finance fella

The advice provided presents only a single alternative to eliminating debt of various types. There are a number of mechanisms to eliminate debt at a lower cost to the debtholder; however, the underlying question is how could one have avoided debt in the first place?

The credit cards do not force you to use them; rather, the owner makes a specific decision to live beyond their means (for those cardholders that carry balances on a frequent/consistent basis). It is true that the card issuer is partially at fault for providing the loan facility to someone who may not be able to handle incremental payments; however, that person made a choice to use the credit line - perhaps a poor decision in hindsight.

Assuming that an individual had a budget to begin with, the likelihood of hitting the easy-credit card drug would have been lower (since the level of fiscal responsibility is generally inversely related to the use of "bad unsecured debt" - unsecured debt accumulated beyond one's means to pay in a one year period).

On another subject, one suggestion that was mentioned was to destory a card that has been paid off (and by destroy it is unclear whether cancellation is implied - cancelling and destroying without cancelling are very different things).

Assuming the suggestion is to cancel the card (and then destroy the plastic), there could be very negative results represented in your credit score based on the number of credit cards you have and the total balances carried across those cards.

By cancelling a card, you are effectively reducing the total line you have access to, so the utilization of your lines (i.e., what % of your available credit are you actually using) will go up. At levels above 10-30% (depending on the lender's credit scoring criteria), there will be negative consequences on the score, despite the fact that the individual is actually getting out of debt.

By destroying a card alone, an individual is only delaying the ability to use the card again - some credit card lenders use a paid-down balance as a reason to reissue plastic, increase credit lines or make a promotional merchandise or transfer offer to the cardmember in order to create incremental value on a paid-off account (accounts that are not used cost the lender money).

Guest's picture
Guest

Debtors Anonymous is a wonderful, empowering, life changing group. I can't recommend them enough. In DA we don't use credit cards. And we track our numbers.

Guest's picture
steve

I will add that the first thing to do is to get out of the *cycle of debt*, which is basically the cycle of spending beyond what you earn. To break this cycle, you need to bring your expenses below your income. This means making a budget and tracking your income and expenses and making sure that you keep your expenses below your income. This will mean some difficult behavioral changes, but once you have done this and have decided to stick with it you have broken the *cycle of debt*--you are now spending below your means.

Once you have done this, you are not out of the water yet because even though you are currently out of the *cycle of debt* it will take some time, perhaps years, to pay off your accrued debt balances. But you will notice an immediate improvement in the quality of your life once you are spending under your means.

A good practice I would recommend is to build up one month's worth of savings as a cushion, and only budget that money for your current expenses. In other words, only "spend" now what you earned last month. Put this month's income away for spending/budgeting in the coming month, and only spend/budget what you earned last month right now.

This also will make a huge difference. When you get to the point where you don't even need to make a bank deposit more than once a month because you're spending last month's income, your financial stress level will go down to a very very low level that you won't be used to. In fact, the low financial stress may create other problems--like what to do with your life and time now that you don't spend all your time worrying about the bills.

Now *THAT* is the kind of problem you *want* to have!

Guest's picture
Bobby

$16,000 is a lot of debt, granted, it's not all credit card debt, it's still a big balance to carry. If you are the type who needs the gratification to stay motivated, debt settlement might be the right choice for you. It's a tough decision whether to go it alone, or to use a debt settlement program, but if you are really struggling to make minimum payments, or are missing payments, it will help you in the long run.

Guest's picture

Ahead of investing any more of your time and effort in credit card debt elimination, you should consider if debt settlement is the right option for you. The first question you have to ask is "Do you have a legitimate financial hardship?"

Nora Dunn's picture
Nora Dunn

@Don - You bring up a very good point about whether or not you should seek other action to conquer your debt. Here's a resource for that:

Credit Counseling: When You Need it and When You Don't

Guest's picture
rama

Total Debt Elimination! Don't we, who are burdened by so much debt, all want that? Lolz

I was in that deep hole of debts for a good number of years. It wasn't easy, but I realize now that it had to happen. I needed the nightmares & restless moments that my financial woes gave me; otherwise, I wouldn't have learned my lesson. I wouldn't have changed and would have been stuck to being the materialistic person that I was before.

I'm more frugal now, more matured and wiser coming out of that experience. ;)

Guest's picture
Mark Andy

I would always get for an IVA HELP especially when the debt is already unmanageable. Debt help can help alter the way you pay so that you can pay according to how you are capable of.

Guest's picture
Anderson

Eliminating debt is simple said than done especially if it involves a huge credit and interest rate. A wise move is to seek assistance from debt relief firms. They will be responsible for planning your payment scheme in a way that is easier for you to accomplish. They will also give you useful inputs which you could use to fight off debt.

Guest's picture
Gino

Attacking the debt with the highest interest is the best thing possible to do! Though there are a ton of methods to solving debt and they have to be adapted to the individual. There are companies like this one that can help people solve their problems.

Guest's picture
Gino

Attacking the debt with the highest interest is the best thing possible to do! Though there are a ton of methods to solving debt and they have to be adapted to the individual. There are companies like this one that can help people solve their problems.

Guest's picture

Great article Nora. Thanks for taking the time to break down the expenses, interest rates and different strategies. Consumers need more step by step plans to eliminate debt.

I don't believe in paying anymore than I have to for anything so the clearance rack is always my first stop.

Guest's picture
Janelle

I like comment # 2. If people find out how much they can put aside towards the debt, they may have more success in getting the creditors paid off. Try to eliminate expenses (like premium channels on TV) that would help in freeing up money for the debts.

Guest's picture
Judice

I really like how you guys took the time to outline this. Many people dont really care, but these 6 steps are rather detailed. Thanks.