Credit Card Debt Resolution Plan
This is Part 2 answering the question: ‘What is the best way to get rid of Credit Card debt?’
In Part One we talked mostly about the mindset necessary to conquer debt. We covered a few practical steps, but this article will dig deeper into a sensible plan for getting debt free.
You may be asking, ‘Why should I even listen to this guy?’
Simple answer is, I’ve been there. In 2010 three things colladed that brought about the perfect storm in my life financially.
First, I found myself in almost $65,000 worth of debt. Most of that was from a business partnership that failed. To make sure debts were paid (and my name was redeemed) I committed to pay off the debt.
Second, I changed careers. Can In the midst of consuming financial debt, I was forced into a career change. Paying off that amount of debt is doable; paying it off while changing careers is another thing.
When I say ‘career change’ I’m not talking about a job change. Moving from one company to another. I changed industries all together. You can image the stress.
Third…Not only that, but my aging parents had been taken advantage of financially, so I had to roll up my sleeves to help out. I took on added financial pressure.
So what happened?
My wife and I tackled the debt in the way I will describe below. Within 36 months we were clear of the $65,000 debt. My parents were on solid financial ground. And we purchased a new home (evidently our plan even helped my credit score).
On top of that, I become the number 3 sales person in the state in the industry I chose.
Someone may say, ‘Your hard work paid off!’
Yes. But it was more than hard work. It was because I had a plan.
How exactly did I do it?
Before we jump into some practical steps to wipe out your debt, here’s some things you DON’T want to do. Let’s start with the negatives.
This is a list from Bankrate. Six ‘RISKY’ ways to pay off debt. (see footnote)
1. Pay the Minimum Balance
This only incurs more debt. Paying the least you can on a bill only ensures you will continue to have that debt. Many times you are paying less than the interest (or only the interest), so your real debt never goes away. Only the monthly interest.
2. Pulling Money from Your Retirement Plan
This is a huge ‘No No!’ That money should be untouchable. You will not get ahead by spending your savings.
What you lose in interest (growth) will never be recovered. There are better ways to eliminate debt. General rule: Leave your retirement alone!
3. Robbing Money from Your Emergency Funds.
Remember, this money is the money you set aside for an emergency. According to Bankrate, it is a bad decision to take that money and pay off debt. There may be ‘rare’ occasions this could work, but keep in mind, ‘this is for an emergency (loss of job, etc). Getting out of debt is not an emergency!’
While we agree in principle (if there is a better way, use it), there are times to take extreme measures to get the monkey of debt off your back.
Note: Only do this if you are 100% committed to replace your emergency fund ASAP.
In most cases, we suggest not using all your emergency fund (if you are going to use it). Only use a portion. It’s important to have that safety net.
4. Getting a Home Equity Loan.
Again, you are just robbing your investment. There are better ways to get rid of debt.
Here’s Bankrates advice:
“If you have equity, you don’t want to push yourself too close to 100% loan-to-value. You’re endangering your home.”
5. Skipping Your Mortgage Payment.
Do not miss a payment on your home. Two reasons:
A. This puts you at risk of foreclosure.
B. Your mortgage is also a debt.
In essence, you are ‘Robbing Peter to pay Paul!’ You are only letting one bill go to pay another. It doesn’t work.
C. It creates long term credit damage.
Remember, you are not only trying to get rid of debt, you want to restore your credit score as well. Make sure your plan doesn’t accomplish one at the expense of the other.
6. Taking Out a Loan To Pay Off Debt
Here’s what Bankrate says:
Avoid payday loans at all costs… Title loans, or loans against a car, are usually too costly to pay for overspending.
They do, however, recommend (if consolidating debt) using a unsecured personal loan. This is a loan from a bank or credit union.
Now that you know what ‘NOT’ to do, let’s take a look at a few practical methods to getting rid of debt.
First Things First
You have to have a plan!
I mentioned this before. My success was in the plan.
According to Credit.com, 50% of people with credit card debt said it is important to have a plan. Unfortunately, most people never sit down and map out a strategy. They just take a ‘shotgun’ approach.
When they feel like it, they pay a little extra.
Or they cut out fast-food (when it’s convenient).
One month they may double their payment to a credit card; the next they pay the minimum balance.
They simply don’t have a plan.50% of people with credit card debt said it is important to have a plan. Click To Tweet
You’ve heard the old maxim: Those who fail to plan, plan to fail!
As corny as it sounds, it’s true. The first thing you need to do is develop a plan.
There are plenty of websites, guru’s and books to help you in this area. Go to the library and check out resources that can help you formulate a solid plan.
The key is: Put the plan into action. And stick to it!
That’s the biggest hurdle. Once you take action, results happen.
So the first two steps are crucial:
1. Get a plan
2. Put it into action
We put together a short Slide presentation of our simple debt reduction plan.
John Barker says, “If you can’t make simple work, you’ll never succeed at complex!
Here’s our simple formula. Follow it and you will succeed.John Barker says, If you can't make simple work, you'll never succeed at complex! Click To Tweet
1. Begin with a Budget
We covered this is Part 1. You can read it here.
Before you make a any money decision, you MUST know what money you are working with. It’s impossible to make the right choices without knowing your budget.
Without a budget, money decisions are ‘pie in the sky’ and ‘hope for the best’ choices.
Having a budget means you know:
A. How much money is coming in
B. How much money is going out
C. Where to a lot each dollar
If you don’t know those figures, you will not successfully devise a plan. And you will not win the money war.
Know your money figures. I can’t stress this enough. The budget becomes the final decision maker. This takes the pressure of you. The budget is the master.
2. Don’t Miss a Payment
I’ve seen people try to get out of debt by not paying certain bills. This doesn’t work.When you have your budget in place, you know where your money needs to go. Click To Tweet
When you have your budget in place, you know where your money needs to go. It may mean sacrifice on personal desires, but it should never mean not paying a bill.
It’s an issue of integrity. You purchased the ‘goods’ on credit. So pay your bill. Don’t cheat people by refusing to pay. It will always come back to bite you.
I’m sure you’ve heard the statement: You reap what you sow.
That’s a great motto to live by. So always pay your bills.
On a practical level, you can never get ahead if you are always getting behind in debt. If you fail to pay a bill, the price goes up next month. You pay interest. Plus, most companies will charge you a late fee.
It’s not practical to stop paying your bills when you are trying to get out of debt. It’s tempting. But you must resist the temptation.
That’s one of the reasons you put a plan into place. The plan becomes your governor. It tells you what to do and when to do it.
3. Renegotiate your interest rate
Regardless of what many people think, Credit Card companies will work with you to help you pay off your debt.
It’s actually in their best interest. Believe it or not, if their clients stop paying their bills, their business suffers.
From personal experience I can tell you that most companies have a plan in place to help their clients. You just have to ask.The budget becomes the final decision maker. This takes the pressure of you. The budget is the master. Click To Tweet
Here’s a few tips to keep in mind when approaching a Credit Card company.
A. Let them know you intend to pay off your debt. Don’t threaten with bankruptcy if they don’t help. This gets you no where.
B. Let them know you have a plan. They may ask you to spell out your plan, but most won’t. I’ve found it helps to let them know you are taking your debt retirement serious by having a plan.
For practical help in dealing with debt and collection companies, consider using ‘The Complete Debt Relief Manual.”
C. Be nice. Your debt is not their fault. It’s your fault. So any blame has to go to you. You agreed to the terms of the loan (debt) when you signed for the item(s) you purchased. So be nice to the people you are dealing with.
Besides that, you’ll get further with people if you show genuine kindness and a willingness to work with them.
D. Tell them what you want. This is another reason you must have a plan. When you have a plan, you are in a better position to negotiate.
Let them know what you can afford. If they make an offer make sure it is in your best interest before you agree. This is where a good calculator comes into play.
Find out the following…
1) By paying the amount you agree upon, when will the debt be retired for good?
2) Does their offer actually lower your interest rate?
Ask specific questions. In my opinion, think in terms of interest rate, not in terms of monthly payments.
Anytime I’ve worked with Credit companies, I always approach my negotiation from the point of interest rate.
I know ahead of time what my card rate is, and I ask them to drop it to a certain percentage. That way, the debt is more manageable for me, and they are still making money. (That’s why they offered you the card in the first place. To make money. That’s their business. Realize this and play with them. Just play smart)
4. Stop Spending
We covered this a little in Part 1. It needs to be reiterated.
To break debt and be free, you have to get a handle on spending. This means a lifestyle change is in order.
Again, this is where budget comes into play. If it’s not in the budget, don’t buy it! It’s really that simple.
Right along with this is coupon shopping. That’s right.
You’d be amazed at how much money you can save when you shop smart with coupons. I’m not suggesting you go all out like some people I see on Facebook and Youtube. But truth be told…you can save by looking for the deals in your local newspaper.If it’s not in the budget, don’t buy it! It’s really that simple. Click To Tweet
5. Sell What You Can
This is where it gets tough.
This is where the commitment to freedom is measured. If you really want to see your debt crushed, start selling your toys and use ALL the money to pay off that debt.
When my wife and I got serious about our plan to be debt free, we made some very tough decisions.
We sold both cars and paid cash for two vehicles. It was a downgrade for sure. But that decision freed us from $500-$600 (I don’t remember the exact amount off the top of my head) dollars a month we could put toward debt.
We drove those cars until all our debts were paid.
THEN…we kept saving money until we could pay cash for a better car. Then we upgraded again to a better car. All by paying cash.
When we saw the value of living without debt, we determined to NEVER be in debt again.
We made other tough decisions as well. I got rid of my ‘toys.’ Sold a small boat. A truck. Some furniture (which we turned around and purchased cheaper furniture so we could use the bulk of the money to pay off debt).
I started selling stuff on Craigslist and eBay. The money that trickled in all went to pay down that debt.
Within 36 months, we were clear.
What I’m saying is, if we did it, you can do it.
Yes. It takes determination. Agreement. Commitment. Follow through. Discipline. Strategy. And hard work.
But it can be done. Question is: How bad do you want it?
I mentioned in Part 1, debt is your enemy. Treat it that way and you will win. Compromise with the enemy and you will become a slave.
All of this is great advice Hayden, but how do I actually get rid of my debt?
My answer? Snowball it!
6. Snowball your debt
Snowballing debt is paying down one debt and then applying that payment to the next debt and so on until you’re debt-free.
I’ll offer you a few tools in just a minute. But first let me explain what snowballing debt means.
It works like this:
A. Make a list of all your credit cards and the total amount owed on each card.
B. Organize them by the amount of debt on each card.
For example, if you have 5 credit cards, list them according to balance.
Here’s what it would look like.
Credit Card #1 $1500
Credit Card #2 $1000
Credit Card #3 $750
Credit Card #4 #500
Credit Card #5 $300
Pay off Credit Card #5 first. Pay minimum payments on the first 4 cards (make sure to never miss a payment on any card. But pay extra on Card #5 until it is paid off.
Then take the amount you were paying on Credit Card #5 and apply it to Card #4. Continue to make minimum payments on the remaining three cards. This snowballs the amount you pay on to card #4.
When Card #4 is paid off, you take the total amount you were paying on #4 (which is the combined amount of #5 and #4) and pay it on Card #3 until it is paid off. Always making minimum payments on the remaining cards.
This is snowballing your debt.
Some people say it works faster to organize your debt by interet rate. Paying off the card with the highest interest rate first. Then working down to the next card.
This may technically work ‘better’ in terms of money saved on interest. But I’ve found that it is easier on the brain to pay them off based on the amount owed.
You see the reward of your work faster this way. It builds up little wins along the way.
I think it is also easier visualize what is happening.
Either way works, but our advice is to tackle credit card debt based on amount owed.
Start with the smallest card and work your way to the biggest. When you see the first card paid off, you have a sense of accomplishment. It’s a win. Which encourages you to keep on until all the cards are paid off.
Don’t miss the four (4) tools below we use to streamline and fast-track the process.
What About Consolidating Your Debt?
I’ve seen it done successfully. And I’ve seen it fail. The key is to make sure that you don’t lose ground. It has to be in ‘your favor’ if you consider it.
The times I’ve seen it succeed were..
A. When the individual was committed to a plan. It was well thought out, and fit nicely into the overall debt retirement program. (Read, ‘they had a plan.’ It wasn’t a quick fix)
B. Their specific situation merited the decision. In other words, it’s not for everybody. Know your numbers (money figures) and calculate the cost).
It will not work if you fail to put into place the other debt elimination principles.
There is one more thing I want to add to this plan…
7. Get a Job!
Well…get ANOTHER job. If you really want to pick up the pace and get rid of credit card debt, you need to add income instead of just reduce spending.
The more money you bring in, the more you have to pay toward existing debt.
There are many things you can do to add income to your budget.
Start a side business. Just make sure it is a zero cost start up. This is not the time to add more debt to the expense column.
One of the more popular ways to add extra income is with Uber or Lyft.
I have a friend who lives in Nashville, Tennessee. He started driving for Uber and brought in an extra $1500 a week.
This was in peak tourist season (and he does live in an area that draws a lot of tourism), but he was able to get out of debt with just his Uber money.
Can you do the same? I don’t know. But you won’t know either until you give it try.
Uber not your thing? There are tons of ways to earn extra money.
The Penny Horder found a guy who rents a tent out in his backyard and makes over $1,300 a month on AirBnB. He lives in Mountain View, CA just blocks away from Google’s headquarters. He seized the opportunity and makes money from his location. (see footnote)
Point? It can be done. You just have to look for the opportunities.
I know I said I was finished, but this is very important.
8. Cut Expenses, But Don’t Cut Out Fun
Make sure you have fun in life.
It is possible to enjoy life without going into debt. Regardless of what popular media indicates; fun is free.
My wife and I live in Colorado. We hike every weekend. And it doesn’t cost us a dime.It is possible to enjoy life without going into debt. Regardless of what popular media indicates; fun is free. Click To Tweet
Maybe you don’t live in an outdoor paradise like me, but there are things to do that are free. Nature is free. Beauty is free. Every city has a Chamber of Commerce that can tell you where to find the best free entertainment available.
Use it. You’ll be surprised. Once you learn how to enjoy life for free. You may never go back to ‘paying for fun’ again.
Unlock These Tools You Can Use
Included below are four tools you can use to fast track your debt reduction. These tools are free (of course there are paid versions, but the free ones work great). Just unlock it, download, and go.
Unlock Your Debt Elimination Tools
Four Tools To Help You Manage Your Money and Get Rid Of Debt!
Unlock these powerful tools to help you accomplish your financial goals and eliminate debt. You can do it without these tools...But why you want you?
For practical help in how to deal with creditors, card companies, and collection calls. Offers tips and templates for letter writing and correspondence. Also provides practical advice on how to get out of debt.
This is a course teaching how to use little known laws to your advantage to retire your debt. Note: I have not personally reviewed the entire course. I include it here because of the technical legal information, and others have used it to their advantage. Proceed with caution.
It’s Your Turn…
Do you have a debt free plan?
Have you fought the beast and won?
I’d love to hear about it. Leave a comment below.