Debt Reduction

Exactly HOW I Pay Off Debt, Mortgages And Credit Cards Early

I just received an interesting email from a reader, Bob.

Bob asks, “NCN, I understand how the debt-snowball (and various similar methods) work while paying off debt, but I wonder if you could share HOW you actually paid off your credit cards early. Did you send one payment per month to each debt account? Did you send multiple checks? I am worried that if I send in extra money to one of my accounts, a creditor may not apply the money to my account, if I don’t use the right “process”. Any help would be appreciated! Thanks, Bob.”

I emailed Bob and asked if I could write a post, answering his question. He responded, “Sure!”.

Let’s assume Bob has a fixed monthly mortgage payment, a fixed monthly car payment, and a fluctuating credit card payment.

  1. I use online bill pay, which reduces the number of physical checks I write and the number of stamps I have to buy.
  2. When I receive a bill from a creditor, I send in a check for the “monthly minimum payment due”. In other words, if my car payment equaled $300, I would send a check to my automobile loan company for $300.
  3. After making minimum payments (to all accounts), I then go about “attacking my debt” – by making extra payments, throughout the month, if possible, to a specific creditor.
  4. By using online bill pay, I can schedule MULTIPLE extra debt payments each month. At one point in my debt reduction process, I was sending $5 a DAY to one of my creditors. Why? I loved the psychological boost that I received when I saw, not one, but thirty payments!
  5. Please note, when making an extra payment, it is always a good idea to write the words “apply to principal” in the memo section of the check. Some companies will “hold” any additional checks they receive and cash them at the beginning of the next billing cycle. Needless to say, you want your creditors to cash your additional checks as soon as they receive the checks.

Here are a few things that I would NOT do:

  1. I would not sign-up for a bi-weekly mortgage service. Why should I pay someone to set up a system that I can set up for myself, for free?
  2. Use a credit counseling service. Again, why should I pay someone to set up a system that I can set up for myself, for free? I can call my creditors, I can create a debt repayment plan, I can make extra payments.
  3. Obsess over interest rates. I did do one transfer from a high rate card to a zero rate card, but I didn’t spend my time moving balances from card to card. Instead, I really, really focused on paying off principal.

I hope that Bob enjoys this post – and I can’t wait until I receive an email from him, letting me know that he’s debt free! (As always, please remember that I am NOT a financial professional, and the information that you find at No Credit Needed is just “my way” of doing things. I’m debt free and here’s how I did it.)

44 thoughts on “Exactly HOW I Pay Off Debt, Mortgages And Credit Cards Early

  1. $5 per day? That’s a cool idea. Would be neat to see that many credits on the account statment the next month.

    Now that I get paid every other week rather than once a month, I’m thinking about paying my bills the same way. Just take half my debt bills and pay them every two weeks on the date I get paid. That way I get that extra payment in and I know how much money is left after payday!

  2. Thanks for sharing the nuts and bolts of your system. 🙂

    I imagine the psychological boost of paying it down little by little would be great!

    If people feel they need some outside help in making extra payments each month, they could always set up a reminder system through Google Calendar or some other online reminder service. There’s plenty out there and you can program it to say “Hey, send in the next payment now!” Then if you’re using online bill pay, it just takes a few clicks. Free and it helps you keep on top of the bills. My $.02. (I use Google Caleldar to remind me of my regular bills).

  3. When sending payments for credit cards account, would you also put “apply to principal”? I am just starting to make multiple payments throughout the month.

  4. I definitely agree about credit counseling services. Many of them do a very poor job of writing the checks to pay your bills for you and signing up for one of those can significantly damage your credit.

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  6. I like the idea of $5 per day – It is almost like you skip a coffee or a take out lunch and get rid of debt – less calories, less junk, more healthy from home food, less debt and more mental relief

  7. Great topic, I am sure there are plenty of people who are looking for the exact process. I followed something similar and it worked for me too – the main thing is just to stick to it!

  8. Hello NCN,
    Sometimes the process you describe is not as easy as it should be. I began making extra payments to the holder of my car loan, Honda Financial, about a year ago. I made about $400 in extra payments.
    Then I realized that the payments were not applied to principal. I was mad! I called Honda Financial. They explained that there was NO way to submit a principal payment online. In order to submit a principal payment, I had to send a check to an office in Texas. This second address wasn’t even the address I would send the payment check to if I didn’t online pay.
    I was upset. I think this is very deceptive on Honda’s part. They purposely make it difficult to pay down the principal on your loan.

  9. $5 a day is a great idea. If I could just discipline myself to brownbag it every day at work, I could put another $100/month toward debt.

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  11. Nice Post! In fact, I’m also using the same method now helping my father to pay off his debts. First, I setup an auto payment for each account and pay the minimum payment + a few extra dollars. For example, if I receive a bill around $69.99, then I will pay $100 for it. After that, I also use the same method – attacking a certain creditor account to pay off the balance. So far I achieved great results.

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  13. I used this method to pay off $25,000 in credit card
    debt that my husband and I racked up. I did the auto
    pay for the minimum payment and then I paid extra on
    the smallest debt until it was paid off and then I
    moved onto the next debt. I then moved on to my
    husband’s grad school loan $27,000 and again used auto pay for the minimum payment and then I pay extra during the month. I’ve never had to indicate apply to principal, but we did call the student loan company before we starting paying extra to make sure we could do so online. Once the grad school is paid off we will be debt free except for the mortgage, we will then start paying extra on the mortgage and will call our bank to make sure we can do so online.

  14. Sounds like good advice, but be careful about the multiple $5 payments. If you overdraft and you have all those debits coming in, you’re going to have whopping NSF fees. Imagine $30+ fee per item. Ouch!

  15. About Cassie’s experience with Honda: I had the similar experience at the credit union. I paid extra toward the principal of a small 2nd mortgage I had taken out — and marked “principal payment” on the check — only to discover they had engrossed most of it for interest!

    They first tried to tell me that the CU’s policy forbade them from accepting a payment toward principal when any interest was outstanding, meaning that the only way you could make a principal payment would be to physically go in to the credit union on the date your monthly automatic payment is made and hand over a check the instant the payment posts! I allowed as how a) that probably is illegal and b) it didn’t seem to work that way when I paid off my car loan with extra principal payments.

    Finally, after I made a fairly noisy scene in the lobby, the manager admitted the CU has to accept a payment toward principal when that’s what you specify, reversed the payment toward interest & reapplied it to principal, and revealed the secret code the teller has to write on your check to make it apply to principal: LOPC.

    I don’t know whether LOPC is an industry-wide code used by all banking institutions, or whether it only applies in this one credit union.

    At any rate, it’s to a lender’s advantage to grab every extra penny you try to apply to a loan and call it “interest.” Evidently lenders have come to realize this, and so when you send in a principal payment, remember to check your statement carefully to be sure that’s how the money was used!

  16. I’ve been paying off my old credit card account using on-line payments twice a month, it is almost dead and will be a shock buffer when paid off.

    My credit union has no problem taking any extra attached to a payment and shaving down the principal. I just make a bigger payment and the excess comes straight off. That one is also within a few months of being done.

    My auto loan, however, does the “mail it to a separate address with a letter explaining what you want done” method. They will be dealt with when the other stuff is paid off.

  17. I love this strategy. It sounds like it will work great. I will be using this starting next month.

  18. Not sure how this system works, since multiple transactions will require extra charges from your bank.

    The most advanced strategy is to always pay off the highest interest debt using advances from credits with lower (or the lowest) interest.

  19. I like your way of paying down debt NCN. I do understand Frugal Geek’s point though…with my bank account I’m allowed a certain amount of bank transactions. Once I’m over my limit the bank charges me for every additional transaction. Having said that Frugal Geek, it may mean instead of $5/day, making a payment every few days

  20. I used a debt management agency and it was the smartest thing I ever did. Over $25,000 in debt paid off and I will be debt free by June. There are lots of slimy agencies out there but if you do your homework you can find a reputable one.

    I have not used a credit card in 3 years (I have none!) and will be credit card free for life.

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  25. If my truck payment is 568.90 and I pay 600.00, does the 32.10 go towards principal or interest?

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