How To Lose Debt

I am going to go out on a limb here and assume by virtue of the fact that you are reading this blog, that you have credit card debt. If you don’t, more power to you, and go ahead and skip this section. If you are like most people in this country, you have some credit card debt that rolls over each month and which you pay interest on. Not good. We will need to get those balances paid off.

How are you going to do that? Well, that really depends on your personal situation.

Your first goal is, if you have more than one card to get the balances consolidated somewhere, hopefully at the lowest rate you can find. You only want a single payment to deal with. If you are so far extended on your credit cards that you cannot consolidate onto a single card, okay. We will work with that. But if you can consolidate, please do so.

So, if you own your home, a second “fixed rate” mortgage would fit the bill, and the interest you pay may even be tax deductable.

If you do not own your home and you are a renter, I still want you to consolidate your credit card debt onto one card with the lowest rate, if at all possible. Why would I want you to do that, even paying additional cash advance transaction fees to transfer it?

Because, my friend, it will be much easier in the long run to deal with a single credit card payment than a handful of them. It will be much easier to slip back into debt with a wallet full of credit cards. Also, the total of the minimum payments for a few cards will be more than the minimum payment on one card, so it will be easier to pay more than the minimum payment with one card.

Sometimes banks even give out “teaser” rates, like 2 percent, until a certain date. Take advantage of that card, paying particular attention to what the rate will be after the teaser rate expires. You want to consolidate on the teaser rate card if it has a similar rate as all the other cards you hold after the teaser rate expires. If your credit is so extended that you cannot consolidate, I provide lots of other tips on dealing with banks in this situation later in this blog.

Then, are you ready? Cut up all other cards. Did you hear me? Cut up all cards except one.

Now sure, as the credit cards renew you will get the renewal cards in the mail, but I want you to have the strength to cut those up as they come in, too.

Why wouldn’t I have you just close the cards with the banks, you ask?

Two reasons:

1. If you do not have the strength to take ownership of your spending habits to lose debt, then you might as well stop reading this blog. Losing all debt is the goal, a fairly lofty one at that.

2. Any credit card closures, whether initiated by you or the bank, will negatively impact your credit score.

Why should you care about your credit score if your goal is to lose all debt? Because along the way you will want to be sure you are paying the lowest interest rate possible when paying off your debt, and your credit score directly impacts what banks and credit companies charge you for money that you’ve borrowed. The lower the interest rate, the more money you can put towards the loan principal, to reduce and ultimately eliminate the debt altogether.

Why wouldn’t I ask you to cut up all cards?

Two reasons there also:

1. There are many situations where you need a credit card. Renting a car or going on a cruise are examples.

2. The longer a card stays open on your credit report and you handle the payments well (even if there is no balance), the higher your credit score will be overall.

Now there is an upper side to this equation. If you are one of those people that collect credit cards, too many credit cards will actually reduce your credit score. The reason for this is there is an increased credit risk that you will run out someday and run all of your credit cards up to the maximum, and then default. While I know because you are reading this blog that will never happen, the risk is there nonetheless.

Now we discussed consolidating all credit card debt onto one card, preferably with a teaser rate, and I am going to assume for a moment that you have done that. If you haven’t because you are so far extended, we will get to that later.

You will need to pay particular attention to the rules around the teaser rate. Most teaser rate contracts stipulate that if you borrow any more money after originally accepting the teaser rate withdrawal, then the interest rate is free to float back up to the then-current rate. Are you listening?

That means you will go through this activity to consolidate your debt on a single card, only to have the rate and payment skyrocket because you bought a doughnut and coffee with your credit card at a local doughnut shop. Which brings us to the next subject.

The next key point, from here on out, all purchases are to be made in cash. If you do not have the cash in your pocket, you do not buy whatever it is you want to buy. This is a very important step to losing debt forever.

If you need to use your credit card to back up a hotel room, for example, you may do so, but explain to the desk person that you want to pay cash in the morning and not have anything charged to the card. No more credit card charges, period.

Once you have paid off all of your credit card balances, later in the blog, in the Creating Wealth and Income Section, I will describe how to make more money, tax-free money that is, by running all of your purchases through a single card.

You can only do that if you have sufficient funds at the end of the month to pay off the entire balance of the card. Not the minimum payment, the entire card balance. Later, in the section on budgeting, we will discuss ways of ensuring that when the credit card payment is due, the money is there to pay for it.

So, do we agree all purchases in cash? You are on your way to losing debt forever.

Now the next key point is to pay more than the minimum payment on your credit cards (or cards if you were unable to consolidate), as soon as possible.

The amortization of a credit card debt, that is the number of months required to pay it off in full, can be as high as 20 years!! Are you listening?

Some cards are amortized to make sure you pay interest to the bank every month for 20 years. At that point, you will have paid the bank many times the original amount you borrowed!!

So what I need you to do is to pay more than the minimum payment, much more. Twice the minimum payment or more if possible. How do I expect you to now double your minimum payment? Well, in this blog I will give you lots of ideas on how to reduce expenses, but that is not a license to spend that money. You need to apply any “excess” funds that you acquire by reducing expenses to paying off your credit cards first.

For now recognize that when the card balances are consolidated on a single card (if you were able to consolidate), it is likely that the total minimum payment for the single card will be less than the total minimum payments for all cards. That may seem like I saved you money on monthly expenses already, but don’t rest on your laurels, we are going to take any additional available money and use it to pay off the card earlier. There’s no free lunch in losing all debt. The free lunch comes later!

So for now, we have three takeaways: consolidate credit card debt on one card or fixed-rate second mortgage (if possible), cut up all but one remaining card, and begin paying more than the minimum payment as quickly as possible. All set?

Congratulate yourself. You are on your way to learning How to Lose Debt.