Category Archive: Debt Reduction

We Paid Off Our Credit Card Debt Using This Strategy

Micro-Payments

That’s how we paid off our credit card debt.

Back in 2005, my wife and I created our debt reduction plan.  Fans of Dave Ramsey, we established a mini-emergency fund and then we set to work on our debt snowball.

We were locked-in and focused – ready to get out of credit card debt.  Rather than send just one extra payment, we made several micro-payments, throughout the month.

This kept us connected to the debt reduction process.  Watching our credit card balances drop really kept us motivated.

Each month – we followed the debt snowball list – and made minimum monthly payments to all of our creditors.

We would then send an extra, principal-only payment to the first account on the list.

With our budgeted-for monthly payment and extra payment accounted for – the fun would begin.  We would look for ways to save money – and at the end of the week, we would send a micro-payment to the first account on the debt snowball list.

Very quickly, we began to erase our credit card balances.  The micro-payments began to add up – to the point where we were applying more than twice what we had an anticipated, each month, towards debt reduction.

Long-term readers will remember that we managed to pay off our credit card debt in less than a year.  Using micro-payments really worked for us.  We now use the same strategy to fund our savings and retirement accounts.

dollar-499493_640Side-notes:

Instead of making micro-payments to our mortgage company – we make micro-deposits to our savings account.  At the end of the month, we then send a single, principle-only payment.

The micro-deposit strategy avoids any issues with companies that limit the number of payments allowed during a particular billing cycle.

Using micro-payments is often referred to as snowflaking – a term I first heard from a fellow personal finance blogger.  Since then, several others have written about snowflaking, snowflakes, and the process of using snowflakes to get out of debt.  Check out their articles for more information about the power of micro-payments.  Blessings.

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What To Do After You Pay Off That Credit Card

You have selected and begun to execute your plan for getting out of debt – and you have just paid off that first credit card debt.

You are awesome!

Paying off that first account is an important milestone.  There’s a tremendous feeling of satisfaction which accompanies the completion of any worthy goal.  Take a while to enjoy the success – and then get pumped to move on to the next step in your plan.

Before you move too fast, however, check one thing – the next monthly statement from your credit card company.  You may be in for a surprise.

Even though you paid your balance – in full – you may still owe some residual interest.

Most companies charge interest based on your average daily balance – so while your current balance may read zero – the interest calculation is based on the average of the balance, throughout the month.  You will need to pay this interest, prior to your next statement.

When faced with this residual interest charge, I contacted my credit card company.  The entire conversation took less than 2 minutes and the company waived the interest charge!  I have found that contacting them via the “chat now” feature is really effective and saves a lot of time.

Side note:  Contacting the credit card company worked for me.  Each and every financial situation is unique.  I’m sure that various credit card companies have different policies for different cards, individuals, and circumstances.

Even after hitting zero – you’ll want to monitor your various accounts.  Check for possible charges – for things like subscriptions or annual dues – about which you may have forgotten.  Stay on top of things so you’ll know if any surprise charges hit your account.

Congratulations on paying off that first credit card debt!  Now, on to the next one!  Blessings.

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How We Are Paying Off Our Mortgage

We have a 15-year fixed-rate home mortgage – and we are working hard to pay it off in less than 10 years.

We purchased our home in February of 2010.  The original mortgage term of our our loan was 180 months, with the loan due to be paid off in March of 2025.  So far, we have whittled away 7 months from that date.

Here’s what we do –

Each month we make our monthly mortgage payment.  We do so via an auto-draft from our online banking account.

Then, we make an extra, principal-only payment.  We write (type) the words “apply to principal” in the memo section of the check.  Our mortgage company knows to apply this payment towards our principal – and to not treat it as a prepayment for the next month.

(Once in a while, we will combine these payments into a single check – or withdrawal from online banking – but I prefer 2 separate transactions, so that I can more easily keep track of our extra payments.)

Throughout the month, should we make any extra money – or find that we do not spend any budgeted funds – we’ll take that money an send it to our mortgage company, as an additional principal-only payment.  Often, we’ll have months where we send 2 or even 3 principal-only payments.

ncnblog mortgage

I have seen all kinds of formulas for reducing a mortgage, including bi-monthly payments, or adding an extra payment at the end of the year.  These definitely work – but for us – our simple system works.  We make our payment – then we make a principal-only payment (usually just a few dollars) – then we work hard to make (or save) extra throughout the month – and we send that.

Our approach is hands-on and keeps us focused on this long-term goal.  (We are paying off our mortgage in addition to saving for retirement and kids’ college.)  Blessings.

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Fight For Your Independence And Get Out Of Debt

Let’s not wait until January 1st to focus on getting out of debt.  It’s July – It’s time.  Fight for your independence-  and get out of debt, today!

No doubt, a little dramatic, but you get the point.  Today is the day to start planning for tomorrow.  Here’s how I paid off my consumer debt – including credit cards and an automobile loan – plus some tips and tricks I’ve learned along the way.

Stop Borrowing – This is the key, first step.  Put the credit card in the wallet, and stop using it.  You don’t have to cut it up, or freeze it in a bucket water.  Make a decision to stop going deeper into debt – and then work hard every day to honor that decision.

Start Saving – I know, I know.  It’s easy to want to skip ahead and start paying off debt – and I’m the last person who wants to dampen debt reduction-based enthusiasm.  However, if you are going to make it through the entire process of getting out of debt, you will need an emergency fund.  The amount to save before beginning debt reduction?  I’ll leave that up to you – for me – I always tried to maintain a minimum of $2000 in emergency fund savings, even while paying off debt.

Pick A Strategy – There are several debt reduction strategies, including the debt snowball, the debt avalanche, and my own creation, the debt deluge.  They all work on the same basic principals:

  • List your debts – in the order determined by your strategy – and make minimum payments to all accounts.
  • Make an extra payment to the first account on your list.
  • Continue to make extra payments until the first account is paid off and eliminated.
  • After paying off the first account, take the combined amount (minimum payment and extra payment) which had been going to the first account, and apply it to the second account.
  • Repeat until all of your accounts have been paid off and your total debt has been eliminated.

get-out-of-debt

Live On Budget – If you know where the money is coming from and where it is going, you can know how much “extra” there is for debt reduction.  I’ll have more on creating a budget, later this week.

Think About Interest – I always hesitate to talk too much about interest rates, even though they are very, very important.  I like the idea of living on a budget – and focusing on a sound strategy – and then looking for ways to reduce interest.  When I was getting out of debt, I “surfed” a balance from a high-rate card to a low-rate card, and this saved us a little money.  So, as you reduce your balances, you may want to take advantage of similar offers.  From time-to-time, one of my affiliate advertisers offers a decent interest rate – and if they do – I’ll share that information with you.

Time Is Money – With most credit card companies charging interest based on average daily balance – the sooner your payment arrives, the sooner it is applied to your account, and the lower your average daily balance will be.  Over time, this can save you a not-insignificant amount of money.

Get Pumped – Now, a bit about the psychology of getting out of debt and fighting for your independence.  We were created, I believe, to be both free and connected.  When we got out of debt, we were free from the “weight” of our debt – the worry and associated fear.  We were then able to spend time connecting with the people and things that were truly important to us.

Do It - For years, I listened to radio programs about debt reduction, I read books about debt reduction – I even attended a special conference about debt reduction.  Then, one day, I sat down, put my credit cards in my wallet, opened a savings account, drafted a debt reduction strategy, and I actually did it.  That’s the key – Start today for a better tomorrow.

Getting out of debt can be a struggle – but man is it worth it.  We don’t have to wait for a New Year’s resolution.  No, right now, we can declare our independence, fight for it, and get out of debt!

Insert “USA! USA! USA!” chant, here!  :)

Be blessed.

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