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Eliminate Credit Card Debt - a step by step system

Updated on May 14, 2012
Photo by pongky Flickr.com -- Creative Commons License
Photo by pongky Flickr.com -- Creative Commons License

Bad debt, including credit card debt, has for some people become the biggest and most relentless problem they have ever faced.

Bad debt can be like a ball and chain around your ankle which can drag you down. There is a certain stigma attached to debt problems. We often see it as a sign of failure if we cannot live up to our own expectations or the expectations of others. We shrink from the problem, trying to ignore the growing pressure, and instead create a life of stress.

Yet credit card debt can affect people from all walks of life. Anyone can get into financial trouble but, like any problem, there is always a solution.

The system presented here is a simple method for eliminating your credit card debt for good. It is designed to help you take back control of your finances and systematically get rid of your bad debts one at a time.

It is based on John Burley's (author of Money Secrets of The Rich) "Debt Terminator" and Jamie McIntyre's (author of What I Didn't Learn At School But Wish I Had) methods for debt reduction.


The Step By Step Sytem to Eliminate Credit Card Debt

This 5 step system is simple to implement but is does require you to take action and have a degree of discipline to see it through.

Step 1. Organise Your Debts

You will need to get all your debts together in one pile. This includes all your consumer debts such as credit cards, store cards and personal loans.

Step 2. Calculate a Pay-Out factor for each debt.

Now we are going to create a table of all our debts which includes the following information.

  • Debt Name (the name of the lender will do)
  • Total balance owing
  • Minimum monthly payment

Now we will calculate the "pay-out" ratio by dividing the total balance owed by the minimum monthly payment and add that to the last column.

Example:

Debt Name
Balance Owing
Minimum Monthly Payment
Pay-Out Factor
Best Store Card
$1,500
$100
15
BANK Visa Card
$4,000
$120
33.33
BANK Mastercard
$8,500
$300
28.33
ABC Visa
$5,000
$100
50
Car Loan
$10,000
$260
38.46
Total
$29,000
$880.00
 



Step 3. Order your debts in "pay out" priority from lowest to highest

Now we are going to put our debts in "pay-out priority", starting with the debt with the lowest ratio first. We want to pay off the debt with the lowest factor first as this will be the quickest to pay out. It will help us to build momentum and see results quickly. This will give us a psychological advantage in our debt reduction strategy. There's nothing like quick results to encourage us to keep going!


Debt Name
Monthly Payment
Pay Out Factor
Best Store Card
$100
15
BANK Mastercard
$300
28.33
BANK Visa Card
$120
33.33
Car Loan
$260
38.46
ABC Visa
$100
50



Step 4. Determine how much extra you can apply to this debt each month

This is the step that does require a little discipline!

You will need to prepare a budget to work out how much extra you can apply to the debt with the lowest factor each month. There are many resources on the Internet that you can use if you need help with this.

By deducting our regular monthly expenses from our monthly income we can calculate our surplus (hopefully you have found a surplus!) and use this for our debt reduction strategy.

For example, if you find you have an extra $200 over each month - after paying all of your living expenses - then we would apply that to the debt with the lowest factor first.

Instead of paying the minimum payment of $100 to Best Store Card, we would pay $300 a month off this card ($100 + $200 = $300). This will allow us to pay this card off in 5-6 months and we can then move on to paying off the card with the next lowest pay out factor.


Step 5. Apply the system to paying out all your bad debts

Now comes the part that requires the most discipline. Instead of spending the money you have freed up each month you will need to attack the next debt by applying the same $300 to it's minimum monthly payment. In this example we will now be paying ($300 + $300) = $600 a month off our next debt, the BANK Mastercard Card.

Once the BANK Mastercard is paid off we move on to the next debt. We will be applying the $600 + $120 minimum payment = $720 a month to the BANK Visa Card.... and so on....until all debts are eliminated.


Do I have to work out a budget?

Although it is recommended, there is another way.

As an alternative you can simply calculate 10% of your gross monthly income and apply that to the debt with the lowest factor. For example if you earn $3000 per month then 10% would be $300. Add the entire $300 to your regular payment of $100 to Best Store Card so each month you are paying a total of $400 off this debt. You will be able to pay out this card in about 3 months and then move on to the debt with the next lowest pay-out factor.


What if I can't afford 10% of my income each month?

If you can't afford to apply 10% of your gross income to paying out these debts then try to add at least 10% to the minimum monthly payment. For example to our Best Store Card we would add 10% of $100 which is just $10, bringing our monthly payment to $110. Of course this will take a little longer but the important thing is to start. If you can afford to pay a little more, say an extra $50, then start there. You can accelerate the payment in the future. Making extra payments is as powerful as building up savings. It will terminate your debt while saving you hundreds (or thousands) in credit card or loan interest over the years.


Photo by bunkerjet4, Flickr Creative Commons
Photo by bunkerjet4, Flickr Creative Commons

Don't set yourself up for failure

Make sure you are comfortable with the extra amount you decide to apply to your first debt. If you set the stakes too high you will quickly lose interest and the system will fail. You should still be able to live comfortably while gradually getting rid of your bad debt step-by-step. Congratulate yourself for taking control and celebrate your success as you move through the system with special treats that you enjoy.


Photo by: SqueakyMarmot, Creative Commons
Photo by: SqueakyMarmot, Creative Commons

This is just one strategy for eliminating credit card debt. For some people it works more effectively than consolidating debt as often people consolidate, then run up their credit cards again, which defeats the purpose.

Remember that getting into debt is a habit and a habit that needs to change. This step by step system can help you create new habits so you become the master of your finances and no longer a slave to bad debt.

You will need to get rid of the credit cards (just cut them up) to resist the temptation of more spending as you pay each card out.

"But I still need a credit card"

Consider applying for a Debit Visa Card that "debits" your purchases, online shopping and bill payments straight from your bank account. That way you can avoid over spending as you can only draw on money you have in your account.

If you insist on keeping a credit card for emergencies don't carry it with you when you go out shopping. Store it in a secure place at home. Some people have been known to keep their credit card in the freezer! That way it can't be used for impulse buying.

Does this method work for everyone?

This system outlined here is a very effective and proven method for eliminating credit card debt one step at a time. If you have a mortgage you can add that to your list and apply the same system for paying it off sooner.

However, I don't know your personal situation and this system will not suit everyone.

If you feel your debt is uncontrollable and you require more assistance with eliminating your credit card debt it is recommended that you seek professional help. There are credit counselling services, often run by churches or local councils, that can give free advice and sometimes negotiate with creditors on your behalf.

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