The Debt Detonator: A Plan for Eliminating Credit Card Debt – Step 4


Updated on Wed Nov 12, 2008

From the Previous Posts:

Step 1Calculate Your Debt to the Decimal Point
Step 2Lower Your APRs
Step 3Transfer Balances

Step 4-5

Attack Your Debt:

Congratulations – if you have been following my strategies you have already saved yourself tons on finance charges by lowering your APRs and taking advantage of balance transfers. So now what? Some financial advisors claim that paying off lower balances first empowers consumers psychologically to continue paying off their debt. But even though it’s a great feeling to see those balances hit zero, you are actually losing money by not paying off the cards with the higher balances and APRs first.

In your spreadsheet, prioritize the cards in the order that you will pay them off. Credit Card 1 is the card with the highest priority level and is listed in the first row of your spreadsheet below the column headers. This card will either have the highest balance, the highest APR or a combination of both.

The priority in which you pay your cards off will be based on your particular scenario of debt – quite literally, your deck of cards.

Below I have described three common scenarios of debt distribution:

Goliath: The Card With Such A High Balance You Wish It Would Self-Destruct:

In what I call the “Goliath” scenario, you have one credit card with an extremely high balance compared to your other cards, which have low to moderate balances. Unless you have a 0% APR rate on this card, prioritize paying it off as soon as possible. After creating a budget (see Step 5), you will allocate the majority of your budget reserved for credit card expenses to this high balance card, paying off as much above the minimum monthly payment as possible. When you have paid it off move on to the second credit card that you have prioritized and repeat the same strategy.

Combination Cards: High Balances Versus High APRs

In this situation you have a combination of credit cards with high APRs and moderate balances and other cards with high balances and lower APRs. In this case choose both the card with the highest balance and the card with the highest APR. Move these two cards to the top two spaces in your Excel spreadsheet and prioritize paying off both these cards before moving on to the others.

Even Playing Field

In a situation where your cards have roughly equal balances, prioritize paying off the card with the highest APR, and after paying it off completely move on to the card with the next highest APR.

One Last Tip:

  • While you want to concentrate almost exclusively on paying off your prioritized card or cards, try to pay slightly above the minimum monthly payment on your other cards too. This way all of your monthly payments are not going to interest rates alone and you are slowly but steadily eliminating all of your other debt at once.

Step 5

How Do I Pay For All Of This?
In my article about the Freshman 15 of credit card debt, I advised this year’s incoming class to spend a month living as they normally have been while carefully keeping track of how much they spend. The same strategy to create a budget can also be used by non-Freshman.

Oliver, who you met in some earlier segments, was shocked when he realized what he was spending each month. I had advised him to spend as he normally does for one month while keeping track of every dollar that left his wallet. At the end of the month, he created an Excel spreadsheet with columns listing different categories of his expenses, such as transportation, dry-cleaning, housing, household items, gym membership, clothing, student loan payments, vacation, entertainment, etc. Then, based on what he had been spending, I asked him to evaluate what he couldn’t live without. He was surprised to see how much he had spent on things he didn’t need or didn’t even really want.

When you follow the same steps, calculate what spending you can cut down on from each category of spending, sum up the numbers and insert that amount into a new column called “Credit Card Expenses.” This will be the total pool from which you draw your credit card payments each month.

Depending on the amount of debt and expenses you have, you may have to work harder to cut corners. More often than not though, people are surprised to see how much they can live without while still living well.

Keep in Mind…:

  • It’s important to be honest with yourself when determining what living expenses to cut. There may be things that your friends see as frivolous but that you can’t live without. If you can’t live without your own, new DVDs or freshly glossed nails, then find something else to cut instead.
  • Sometimes we can still afford the things we love by paying a lot less for them. For instance, you can save money on gyms by looking for holiday deals or buy designer duds online at bargain basement prices.

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