My wife and I used to spend big spenders. We spend, spend, spend and care about where the money would come from to pay our credit card bills later. When we finally woke up to the fact that we were killing our financial future we had over $10,000 in credit card debt. The following are the three great tools we use to get us out of credit card debt.
I) Debt snowball. If you read any of the different personal finance authors, you will read about the concept of debt snowball. The reason for this is that it works. If you don’t know what a debt snowball is, I’ll provide you with a quick step-by-step:
- Make a list of all your debts. (A sheet of spread works very well). Include these data points in your list:
Total amount of debt
Minimum debt payment
- Determine how much money you have available to pay off your debts each month.
- Make the minimum payments on each card.
- Pay all the extra money to pay a balance. DO NOT pay a little more here and a little more there. Work on one balance at a time to pay for it as quickly as possible. What to pay first? This is a point of debate. Many personal finance writers will suggest paying the balance at the highest interest rate; many others will suggest paying the balance with the remaining lower balance. I agree with the lowest balancing method. Here’s why. I paid for our first credit card in the first month and our second card in the second month two! They were huge mental victories for us. If I had attacked the highest rate I would have taken five months first, and I could have been discouraged before paying for it.
- After paying for a credit card, then attack the card with the next lowest balance. Pay the minimum of this card plus all the money you were paying for the previous card (the one you already paid!!!)
- Then keep repeating this process until all your credit cards are paid for! The more cards you pay, the more powerful this method will be, because you have more and more money available to pay off the debt each time you pay a card.
Using this process we pay all our credit cards in just a few months. But there was something else that helped us pay off our credit card debt quickly. We use the concept of money found.
2) Money found. Every month we have income that doesn’t come from our jobs. I call this money found. You know the money I’m talking about. I could get $25 from my grandmother for my birthday or $150 for winning my fantasy football league or $10 from an email in refund. The problem is that this money comes from any channel and is not counted before it is spent and gone. The trick to paying off your debt faster is to consolidate all the money found and pay it for the debt you are currently trying to repay. If you are paying the minimum plus all the extra money you can afford to pay more all your money found your total will actually add up. This will allow you to pay off all your credit card debts even faster.
3) Find more money found. With the success of the debt snowball and even more success using money found to pay off our credit card debt, we quickly look for more ways to “find money”. We started actively searching our home for items to sell on eBay. We went through and organized closets, desks, garage, etc and everything we no longer wanted or needed that had value was posted on eBay. Some items didn’t seem practical to sell on eBay as the second lawn mower we had for some reason… So we also made a garage sale to raise more money to reduce the debt. Another way we found money was by selling books about Amazon.com. We have shelves and shelves full of books. So we checked all the books and published the ones we no longer wanted in Amazon.com. For a while we were selling 1 – 3 books per week with minimal effort. All the money from eBay, Amazon and garage sales is consolidated into our debt snowball and helped us pay our credit card debts very quickly.
While the content of this three-part plan is really nothing new. I wanted to share the success you’ve given our family. We don’t have credit card debts. We still use credit cards and did it throughout the whole process. We don’t cut or freeze them in blocks of ice, but we shift our mindset to a more responsible credit card management system.