When my wife and I were getting out of credit card debt, we worked hard to reduce two things -
the total debt balance – what we owed to all of our creditors (total credit card debt) and
the total amount of interest we were paying each month to finance our credit card debt.
When we first started paying off our debt, we were not overly concerned with out various interest rates. Instead, we focused on attacking our various debt balances, in hopes of quickly paying off all of our accounts.
It became apparent, after a few months, that while it was very important to focus on the amount we owed, it was also important to focus on interest rates. The obvious reason: The less interest we had to pay, the more money we had to put towards balance-reduction.
We found the following things worked for us, to decrease both interest rates and monthly finance charges -
1. We made all minimum credit card payments on the same day that we received our credit card bills. This was true of bills that we received via regular mail or via online access. Payments were made, not on due dates, but long before. Thus, we were able to spend the rest of the time, between bills, focusing on extra, principal-only payments. Almost all payments were initiated using online checking. At times, we would send in principal-only payments at this same time – but when we couldn’t – we made absolutely sure that we made all payments early and very on-time!
2. We made principal-only, micro-payments throughout the month. As we saved money (from careful shopping and using a budget), or earned extra money, we would take that money and apply it towards our account balances – thus reducing our average daily balance. Many credit card companies use average daily balance to calculate finance charges, and combining the micro-payments with paying our bills as soon as possible, we reduced our average daily balance. We checked with all of our creditors for limits on the number of payments they would accept during a payment period.
3. Just before we began our debt reduction process, we transferred a portion of our credit card debt to a credit card offering zero percent financing. If memory serves, our deal was zero percent for 12 months. Currently, Discover it™ Card is offering a zero percent interest rate on transfers – for 18 months. They will charge a 3% balance transfer fee – see the link and the application for full details – and run the numbers. We made sure that we could pay off our balance, in full, before the zero percent period was over.
Once we paid off – in full – one card, we would budget the amount that had been going to that card, and apply it to the next card on our list. This is the classic debt snowball. We also maintained an emergency fund – between $800 and $2000 – so that we didn’t have to use our credit cards for unplanned-for expenses.
Our process was rather simple and uncomplicated. Over and over, we made our minimum payments, worked hard to save cash, made extra, principal-only payments, snowballed our accounts, and took advantage of the zero percent offer. In 11 months, we paid off our credit card (and automobile) debt – and now we are consumer-debt free! (And working hard to pay off our house!)