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You’re in debt, deep debt. Now what? First, understand that the past is the past. You can’t snap your fingers and give back the expensive dinner that you had the other night. The same goes for the trip to Hawaii, the new addition to the house and the myriad of other purchases that are non-returnable. No need to feel guilty, just assess where you are, how you got there, swear to yourself that it’s time to change and go to work.
Assuming that all purchases that can go back have already been returned, the next step is to get moving paying down your credit card debt. In fact, if you were really, really good at getting into debt, you most likely have three or four credit cards, maybe even more; all with sizeable balances. Relax, take a deep breath and follow these two simple steps and you’ll be home free.
Step 1: Determine how much you can commit to paying toward your credit card debt – then find more. What are you spending money on that you don’t really use or like (remember the concept of utility discussed elsewhere?). Cancel that magazine subscription, get rid of your premium cable channels, end the wine of the month club. Scan your credit card bill(s) for recurring monthly charges. When I wrote this article I scanned mine and found $234 dollars.
Remember the three S’s
1) Shed costs;
2) Simply your life;
3) Sleep better at night.
Ok, now that you’ve got some cash, how are you going to pay off your debt? There are many theories, most have merit, but we like the High-Low Method
Step 2: Pay Them Down Using the High Low Method
In a nutshell, the High-Low Method states that you pay off your credit cards from highest interest rate to lowest interest rate – making the minimum payment on all but the highest rate cards along the way. Apply all extra cash to the highest rate card. Once that credit card is paid off, repeat the process with the second highest rate credit card, then the third highest rate credit card, etc, until you are left with no debt, then go out and enjoy your life.
There is no question that the High-Low method is the fastest and least expensive way to pay off your credit card debt, because you are reducing the debt that has the highest interest charge first. Paying higher interest charges takes away from paying down the principal balance on your cards, so get rid of the highest costs first.
Here’s the math, assuming $10,000 of credit card debt and $500 a month to pay it off.
Assume you have five credit cards, each with a $2000 credit card balance, and interest rates of 18%, 16%, 14%, 12% and 10% respectively. To make things simple let’s say the minimum payment on each card is $50/mo. Here’s what the payoff looks like:
Card A at 18% / $300 per month ($500 per month minus 4 cards at $50 minimum a month) = 7.07 months to pay off Card A.
Card B at 16% / $50 per month for 7.07 months (while Card A is being paid off) and then $350 per month thereafter = 7.07 months + 5.44 months = 12.51 months to pay off Card B
Card C at 14% / $50 per month for 12.51 months (while Cards A and B are being paid off) and then $400 per month thereafter = 12.51 months + 4.23 months = 16.74 months to pay off Card C
Card D at 12% / $50 per month for 16.74 months (while Cards A, B and C are being paid off) and then $450 per month thereafter = 16.74 months + 3.30 months = 20.04 months to pay off Card D
Card E at 10% / $50 per month for 20.04 months (while Cards A, B, C and D are being paid off) and then $500 per month thereafter = 20.04 months + 2.58 months = 22.63 months to pay off Card E
Assuming the fact pattern above, in less than 23 months you’ll be credit card debt free.
The key to the High Low Method is to make your payments on time, and don’t deviate from the payment amount. The rest will happen automatically.
Go get ‘em!!!