One often overlooked principle for getting out of credit card debt is the idea that each card should be paid off one at a time. This does not come naturally, as we tend to look at the entirety of all our monthly payments combined as anywhere from somewhat overwhelming to impossibly overwhelming.
However, if we can just focus on just one debt to eliminate first, then we just have to commit to an extra amount above the minimum we are going to pay each month in order to accelerate the elimination of that specific debt. We simply focus on getting rid of just that one (credit card, student loan, car loan, mortgage, etc) debt, before we then move on to the next target for elimination, handling each one of them one at a time. We continue through all of our debts in this manner until they are all eliminated in entirety, and we are completely debt-free.
Don’t expect this to be a quick process – unless you get a windfall lottery settlement, inheritance, lawsuit settlement, and so on, then your ability to accelerate debt payoff will be solely dependent on the sacrafices you are willing to make in order to do it. If we get a tax refund at tax time, we should strongly consider using that to speed up debt elimination as well.
Here’s an real example from my own finances:
I recently decided that my next target for payoff would be my private student loans which I have been carrying for the past ten years. If I had continued making minimum payments, they would have been paid in full by 2012, however, today I am proud to say that I just finished paying them off entirely three years quicker.
The debt consisted of four separate educational loans which were not federal debt at interest rates between 8.5 and 9.25 percent. Every month I made minimum payments on all of them, which was about $ 125 on combined balances of $ 4,500 between all four (Note: The original balances added up to $ 6,000 and only $ 1,500 of prinicpal had been paid off during the past ten years of minimum payments). Then I paid an additional $ 50 towards the loan with the highest interest rate also. In about 18 months, I had eliminated one of the four and reduced my monthly payment to about $ 92 per month, so then I decided to start working on the next one by paying $ 150 per month total, using whatever is above the minimum to pay off the loan with the next highest interest rate sooner.
PAYING IT IN FULL
FREED UP
$ 92 CASH PER MONTH
In another six months, I had reduced my total prinicpal balance to about $ 2,500 and built up almost $ 10,000 in emergency savings as well, so I decided to take a chunk of my emergency savings and pay off the remaining balance in one lump sum, thereby retiring a student loan debt I had been carrying for 14 years, saving thousands of dollars in interest over the remaining life of the loan, improving my credit score, significantly enhancing my debt-to-income ratio, lowering my overall cost of living, and freeing up another $ 92 per month in payments that I can now use to either rebuild emergency savings again or pay off some other debts sooner.
Shown above: my private student loan balances after paying them off.
My next target for elimination, in case you are wondering, is the tuition and fees we still owe my wife’s college for her last semester of work there. That one is a $ 212 a month payment on what is a $ 4,000 or so balance at the time of writing this entry. I’ll keep you updated on that one in a later blog post.
