5 Tips for Getting Out of Debt (and Why)
When young people are first starting out in life, either as college students or young workers, debt looks like an easy solution to the shortage of money that seems to go with this period of life. It’s only a temporary fix, however, and will set a person back in the long run. Suze Orman, in The Courage to Be Rich, points out the outrageous amount of money that is paid on interest over the years with credit cards and other debts. She and other financial experts offer some tips for getting out from under.
1. Know about your credit cards. When you get the bill, look it over until you find the APR (annual percentage rate), which is the interest rate. Credit cards sometimes list other percentages and fees, but the APR is what will get you in the end. List your cards from highest to lowest APR. For instance, put that 27% interest card first, and the 0% cards last.
2. Work from the top down. Pay as much extra as possible on that top card each month. Make minimum payments on the others. When that highest card is paid off, start the process with the next card on the list. Carry out this procedure until all the cards are paid off.
3. Round up. For speeding up the time it takes to pay off your mortgage, simply add a few dollars each month. Those dollars are applying to the principal, and even a few dollars a month can trim years off your debt. One idea is to round the amount up to the nearest ten.
4. Emergencies? Experts disagree about the wisdom of keeping one low interest card on hand for emergencies. Frankly I think it makes some sense, but Dave Ramsey, author of The Total Money Makeover: A Proven Plan for Financial Fitness, says No. He says you should perform “plastic surgery” on those cards and cut them up. The bottom line is how you define an “emergency.” If it’s seeing a great deal on something you’ve been wanting, like a new guitar, maybe, but you don’t have enough money to cover it right now . . . well, that’s not really an emergency!
5. Keep it empty. If you do keep one card on hand for convenience or whatever, the best policy is to always pay it completely every month. Otherwise you are actually living beyond your means. Orman describes that lifestyle as living a lie. It’s been said that many people “spend money they don’t have on things they don’t need to impress people they don’t like.” Think about that statement and see if it applies in your own situation.
An old classic success book is Success Through a Positive Mental Attitude by Napoleon Hill and W. Clement Stone. These authors listed seventeen principles of success, of which one was what they called “O.P.M.” This acronym refers to “other people’s money.” They advised borrowing money to invest in one’s own business efforts, and then thinking positively so that money would grow. It’s an interesting idea. What do you think?
References:
Ramsey, Dave. The Total Money Makeover: A Proven Plan for Financial Fitness
Orman, Suze. The Courage to Be Rich: Creating a Life of Material and Spiritual Abundance.
Hill, Napoleon and Stone, W. Clement. Success Through a Positive Mental Attitude
Barbara Wood is a writer and educator living with her family in the Missouri Ozarks.
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Comments
Randy says on January 31st, 2006 at 4:09 am
We’ve looked at this method but decided to use a method to pay off the lowest balance cards first no matter what the intrest rate is. Say we have 5 cards with from $500 to $5000 balances.
By doubling the payment on the $500 card to say $100 a month it will be payed of in a few months. Then just dump that $100 on to the next card’s payment. Then when that card is payed off then add that payment to the next card, and so on.
We may be paying on some higher interst rate cards longer, but we will be paying off the other cards sooner thus allowing us to double and triple the payments on the higher balanced cards sooner.
I hope that makes sense.
Matthew Price says on January 31st, 2006 at 4:28 am
The rate shouldn’t be the way of determining which credit card to pay off most agressively. Instead, the interest charges should drive that decision. Its possible to have a card with a large balance and a low APR that is costing you more in finance charges than a card with a high APR and low balance.
Also, one thing that I do alot is call my credit card company and ask them to lower my rate. The almost always will do something for you because they want to keep you as a customer.
Jared says on February 3rd, 2006 at 7:37 am
I have a simple budget that allocates a percentage of my monthly income to various “virtual accounts”, and when I was in debt, one of those accounts was for debt reduction. For example, I take 20% of my income each month that can only be used for investing and buying assets (a pay-myself-first account). When I had debt, I had a “Debt” category that would take a certain percentage of my income each month to pay off debt. When my debt was eliminated, I started contributing the money that went to debt reduction to the pay-myself-first account. (I did all this in excel. My company is actually creating a simple personal finance web app that will do this too.) Does anyone else use a similar method?
nicole says on February 4th, 2006 at 11:41 am
Once in debt always in debt. When I was young I got myself in bad debt with credit cards. I got out of it with some help and stayed free of credit cards for 10 years. Then I was mailed a pre-approved one and guess what I thought I was smarter with my old age but I did it again and WORSE this time. Really what is the point in a credit card.Just save for what you want. If you werent paying off debt you might be able to afford more things in the first place!!
Pay Off Debts says on January 1st, 2007 at 7:33 pm
Here’s another one:
Just Pay Off Your Debts – Quit spending more than you take in and pay off what you already have. Tackle you high interest rate debts first and work your way down. As each debt is paid off you are left with fewer creditors and lower interest rate obligations. This is what we call consolidation by elimination.
UKCreditCard says on January 9th, 2007 at 10:07 am
An important thing to do is to reduce payments by getting any balances off high interest rates and onto zero percent or at least very low percent deals. This provides some relief.
UK 0% balance transfer deals are listed here : http://www.applyforcreditcard.org.uk and follow the link to the 0% cards page.
Travis says on January 11th, 2007 at 11:28 am
Check out snowballing: http://us.whatsthecost.com/snowball.aspx
it lets you enter your data for your cards, choose whether you want to pay high interest rates or lower amounts first, and then how much you want to put toward your debt each month, and it gives you a month by month, debtor by debtor list of how much you will pay to whom. This way you can see how long until you’re debt free, and how your cards will free up.
Jenn says on October 8th, 2007 at 2:01 am
Seriously, did anyone read the whole text? Most of the comments are saying the same thing the text is and it pisses me off! APR is interest, durr du durr! But I agree with the comment about paying off your lesser debts first allowing you to pay more on the higher debts! I think in the end it works out to your advantage being that it doesn’t take long to get a lesser debt paid and when you can pay all that plus your normal payment on a higher debt, it works itself out to be paid off quicker!
Donna says on July 23rd, 2008 at 3:26 pm
I would have thought Step 1 should be “STOP using the credit card – pay cash for everything you need to buy.”
Health blog says on July 16th, 2009 at 6:54 am
Once in debt always in debt. When I was young I got myself in bad debt with credit cards. I got out of it with some help and stayed free of credit cards for 10 years. Then I was mailed a pre-approved one and guess what I thought I was smarter with my old age but I did it again and WORSE this time. Really what is the point in a credit card.Just save for what you want. If you werent paying off debt you might be able to afford more things in the first place!!