High interest debt (Tip #1)

I'd like to share with you some thoughts on getting rid of credit card debt.

First thing you need to do is prioritize your debt by interest rate.  If you have a card at 18% and a card at 23%, you should pay only the minimum balance on the 18% card, and pay as much as you can on the 23% card.  If you take $100 of the money you were going to pay on the 18% card, and pay it on the 23% card, you have saved over 5% of $100 in the course of the next year.  This means $5 less interest on your balances, than if you had spent the money incorrectly.

Now if this were a monthly pattern of misspending this $100, then the yearly difference would be 12 times as much, and more like $60 per year saved in interest alone.

You have to make your highest interest balances, the priority in getting paid off.  To extend on this thought, it is a super idea, if you can get the credit, to borrow money at a lower rate, to pay off your higher rate debts.  The obstacle is a financial institution may feel you are too far in debt, and consider you a risk.  If you can't get the loan (consolidation), and can't get a co-signer to back you for the loan... Then it will help to use some of the ideas in this column to help you get in a better financial position, and keep going back until they approve you.  I once re-mortgaged my house to pay off my high interest debts.  The thought here is that my house was mortgaged at 7%, and my credit cards were 18% and up (yes there are low rate cards, but there is a yearly fee just to have them, and I guess I just didn't have them, maybe I should have, but hey, give a guy a break, I'm not perfect, I'm just trying to share some advice here).

Now if the above is for some reason not possible, there are some smaller things that you can do to help yourself.  Here's one thing I did in the past.  My mortgage has a once a year option to "skip a payment".  The bank that I deal with has that option with virtually every mortgage deal they do (check with your bank).  So the $500 for that month's mortgage payment (yes my mortgage is in the $500 a month range, I live in a rural area) went onto my credit cards instead.  Sure my mortgage balance was $500 greater, but my credit cards were $500 lower.  I offloaded $500 worth of high interest debt for $500 worth of low interest debt.  I've done it a couple of times in the past.

 

   Please don't underestimate the power of these savings.  Answer yourself this question... How long have you been in debt to the tune of paying monthly interest.  That is how long since you could pay the full statement balance to have no interest charged, on all bills.  When were you ever interest free.  For a lot of people, it is years.  This being said, you may have to accept the fact that it may be for years to come.  So each year that I remained in debt, I reap these savings.  The $60 interest savings mentioned above is per year.  Now with the $500 of mortgage money, I saved 11% (18% credit card minus 7% mortgage rate = 11%) of $500, $55 per year for every year that I will be in the high interest debt situation.  Assuming I'm still in credit card debt 5 years from now, I will have accumulated $275 less interest ($55 x 5) in the process.  All of this savings from a "one time transaction".  If I do the $500 every year, then I reap these savings each time I do this.

If you look at it, it is really along the lines of my first thoughts above, of paying as little as you can get away with on lower interest debt, in order to pay more on your high interest debt.  Once you've ridden your-self of your high interest debt, you can consider attacking that mortgage, or other lower interest debt.  Speaking of mortgages, if you are the Category A type of person, and you are in a mortgage situation, you should take the longest term possible.  For example, a 25 year mortgage, instead of a 15 year.  The lower payments will help to keep you out of high interest debt.  Again, going with the principal of attacking your high debt loans the hardest.

I really hope that I help a lot of people with this article.  I know there is a lot of funky math above, please let me know whether or not my points were clear... comments please...  bigguy@fundiscoveries.com.

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