7 Steps Debt Reduction Illustrated
By Pinyo • Nov 28th, 2007 • Category: Credit and DebtThe following post illustrate how to eliminate credit card debt on your own without using credit card debt consolidation services. Personally, I think these credit card debt consolidation companies could be helpful to some, but for the most part, they are charging you money for something that you could do on your own.
Here is the 7 steps debt reduction strategy in a nutshell:
1. You owe money on four credit cards. Uh, oh!
Gather all you credit cards and make a list. On the list write down the name of the card, what you owe, the credit limit, the current interest rate, and the phone number for each card.
Note: In the illustration, the 1st number is the balance, 2nd number is the credit limit, and 3rd number is the interest rate
2. Call for lower interest and “no fee 0% APR” transfer
Call each company and ask for a lower interest rate; also check if they will offer you a “no fee 0% APR” transfer*. If the first rep won’t budge, hang up and call again. There are good reps and bad reps, you don’t want to waste time with the bad ones.
If a company gives you a better offer, feel free to share that information with the others — it might motivate them to be more generous.
* If you can get a “no payment” grace period (i.e., no payment for 12 months), that’s even better!
Tips:
- Don’t limit yourself to credit card companies, seek out other lenders who might offer you a better deal — i.e., credit union, bank loan, Prosper, etc.
- If your existing credit card companies refuse, you might try applying for a new card that will offer a “no fee 0% APR” transfer.
- Card company may not be willing to lower the interest rate on existing balance, but still offer 0% APR transfer. In this case, you might want to pay off the existing balance first to take full advantage of the 0% APR transfer (see Paidtwice’s comment below)
- If the rep won’t budge, you can also ask to speak to the supervisor. They are usually more accommodating (see ChristianPF’s comment below)
3. Sort the cards from the highest to the lowest interest rate
In our example, card A gave us the magical “no fee 0% APR” transfer, card B and C gave us a courtesy interest rate reduction, and card D won’t budge.
Update your list with the new interest rates, and sort them in order from highest to the lowest interest rate.
4. Transfer balances from the highest interest cards to the lowest
This is the quickest way to save money, transfer balances from high interest cards to the lowest interest card(s)*. For example:
- Transfer $300 from card D to card A (now that you paid it off, put it away)
- Transfer $500 from card B to card A (maxing it out)
* Assuming there is no transfer fee. If there’s a fee, you will have to do some calculation.
There are also a few things you can try:
- Ask card A to increase your credit limit, so you can transfer even more to them
- Ask card D and card B to reconsider…now that you shown them who’s the boss
5. Pay as much as you can off the highest interest rate card
Pay the minimum balance on card C and A, and concentrate on paying the most you can on card B. Let’s assume you pay:
- $100 on card B
- $20 on card C
- $20 on card A
If a card offers “no payment” grace period, then don’t pay anything and use that money to pay the highest interest rate card. However, you have to be careful and keep track of when the first payment become due — many card with no payment period retroactively charge you interest for the entire period (i.e., from day 1).
6. Snowball your debt
Once card B is paid off, snowball that monthly payment to card C. For instance:
- $120 on card C ($100 from card B and $20 from card C)
- $20 on card A
7. Keep your debt snowball going until you finish paying off everything
Once the card is paid off, snowball that monthly payment to the next card — so you’ll be paying $140 per month on card A.
More about debt reduction:
- Listen To The Dave Ramsey Show For Free @ The Happy Rock
- Exactly HOW I Pay Off Debt, Mortgages And Credit Cards Early @ No Credit Needed
- 10 Small Ways To Make A Big Dent In Debt @ I’ve Paid For This Twice Already…
- The Financial Battlefield @ Poorer Than You
This article was featured in:
- The Carnival of Debt Reduction #116 hosted by Blogging Away Debt. For more information please visit the Carnival of Debt Reduction.
Thanks for the link!
You’ve got to pay off card A before you do the transfer. No way are they going to lower your existing balance to 0%.
Otherwise though, nice illustration
Thank you for the correction. That’s what happen when I post outside of my comfort zone.
When I call my credit card companies, they always offer the “no fee 0% APR” transfer, and I don’t even ask for it. May be it’s because I pay off every month and have good credit score?
I can see how they may be a little more hesitant with folks who owe balance from month to month. In this case, another option is to get a new card that offers “no fee 0% APR” transfer.
Good explanation - those pictures sure make this process easy for anyone to follow. But, er, I do have just one (stupid) question… what is this ‘APR’ of which you speak?
@Jen - welcome to Moolanomy.
APR stands for Annual Percentage Rate, or the effective interest rate that the borrower will pay on a loan taking into account any fee. You can read more about it on Wikipedia.
Ah. See, I *knew* it was a dumb question! Thanks!
Most of this, I agree with.
But you might not want to max out the balance transfer. Maxing it out is going to increase your usage, and usage has a serious effect on your FICO score.
Ref: http://www.commonwealth.com/Re.....scores.htm (not my site) - “it is better to maintain a card at 20-30% capacity than max it out”
Thanks for this post. I’m actually going to apply a little of this method to my own life. I actually have a credit card right now that has a balance of a little under $12,000 on it. The card rate is 18%. I know that it’s crazy but I never really thought of transferring the balance down to lower rate credit cards. I feel silly that I haven’t done this already.
I run a personal finance site because I want to learn about these things, not because I already know it all. This is great advice.
My credit cards offer me 0% transfer offers too. They want to get your money so you can mess up with them and not pay it off all on time and they get some interest. I do have a good credit score too though
I am not saying the card you owe $200 on won’t offer you a 0% transfer - they just aren’t going to reduce your current balance to 0% as well. So the stuff you have on there already will stay at 12% and the new stuff goes to 0%
Which is why you need to pay off that $200 first ;). then do the transfer.
I really liked the illustrations on this, make it much more user friendly and helped keep the cards straight.
Fortunately we were able to pay off our credit card in one fell swoop.
@Pinyo
In regards to your step #1, I have had the best luck asking for the rep’s supervisor. I normally find that they are much more open (or able) to negotiate.
@Jen - there’s no such thing as a dumb question here. I am learning too.
@Matt - thank you. When you ask for transfer, be sure there is no transfer fee; otherwise, you have to do some calculation to see if it’s worth it.
@Paidtwice - thank you for the clarification. I know what you mean now. Usually, the payments also apply toward the lowest interest rate balance first, so you ended up paying the $200 @ 12% last.
@Mrs. Micah - thank you.
@ChristianPF - good add. I added your comment to the post.
Great job on the illustrations! I enjoyed this post. Very good way of showing how to get rid of your debt :). Now there’s no excuse!
@Digerati - hey, thanks! That means a lot coming from you.
Great post Pinyo! There is another option, and one that I prefer…pay them off in order of balance, lowest to highest rather than by interest rate. Sure, mathematically paying off my interest rate makes more sense, but frankly if you have this kind of balance on high interest rate cards your not a pro at math anyway (this includes me).
Paying off by lowest to highest balance is a psychological win. It makes your debt seem to go away faster and gives you that feeling of progress. I think personal finance is about 10% math and 90% psychology.
One other note, it used to be you could transfer to a low rate card for free. Most offers now have a 3% or more balance transfer fee, so be aware of that. Now granted, that’s probably still cheaper than the higher rate, but something to consider.
@glblguy - That’s a great add. I have seen the “10% math and 90% psychology” discussed before and as a logical person, I was against it at first. However, when I reflect further on this, I really support the argument at this point; that is, the mathematically best option may not be the best for everyone.
Very nice illustration and clear explanation.
Good work!
I love the illustrated step-by-step instructions! Great post!
@KCLau - Thank you!
@JvW - Welcome to Moolanomy and thank you for the compliment!
Its actually more effective to sort the cards in order of lowest balance to highest balance, regardless of the interest rate.
Personal finance is more about behavior than math. People are less likely to stay on track when tackling large balances rather than small balances. It also gets your snowball moving much faster to go from smallest balance to largest balance.
The point that people need to realize is that the interest rate isn’t the problem. The out of control spending and use of the cards altogether is the problem.
@Kevin - welcome to Moolanomy. Either method works for me. I prefer the mathematically better approach, but I am sure many people will be more comfortable with the psychologically better approach.
Great point in the closing paragraph.
What a great post, Loved the illustrations as well, it makes it much eaiser to follow.