Paying Off Your Debt
By James R. Cook, CFP®
Senior Manager Large Employers & Mergers and Acquisitions
The first two articles in this series on Understanding Debt focused on reading your credit card statement and improving your credit score. This final article in the series outlines ways to help you pay off your debt.
As with the previous two articles, we’ll focus on credit card debt. For many, this easily accumulated debt can imperil their financial lives.
If unpaid balances on your credit cards are a part of your financial life, read on to learn steps to take control and pay them off.
Before you begin the process, you’ll need to collect two things:
* Recent credit card statements
Now you’re ready!
Step One—Identify Your Debt
Gather the most recent credit card statements for all of your credit cards. Include national credit cards such as VISA and MasterCard and department store cards such as Macy’s and Penney’s. You should also include other types of store credit such as credit from furniture stores or for appliances that were bought on credit but for which you do not actually have a credit card.
For this exercise do not include auto loans, home mortgages, or equity lines of credit on your home.
Enter the information in the first section of the worksheet, noting from each statement the name of the Creditor, the Total Owed, the Interest Rate, and the Minimum Payment that is due each period. Once you have the details for each creditor entered, total up the amounts in columns 2, 3 and 4.
Step Two—Prioritize Your Payoff Order
In the second section of the worksheet you will prioritize the order in which you’ll eliminate the balance from each card.
There are two approaches that you may consider to prioritize your payoffs. Each has its merits.
• Option I: Start with the highest interest rate:
List your debt in order based on interest rate, from highest to lowest.
Paying off your highest interest rate debt has the most financial advantage, because this debt is the most expensive to you.
• Option II: Start with the lowest balance:
List your debt by account balance from lowest, up to highest.
Paying off the cards with the lowest balance may serve as a psychological incentive because you will reduce the number of cards with a balance, and therefore see progress faster.
Pick one method, fill in the form, and then move on to the final step.
Step Three—Execute Your Plan
Use the third section of the worksheet to enter the names of the creditors, in the same order as you did in the second section.
Look at the total for the Minimum Payment. Can you afford to pay more each month? For example, if your monthly credit card expense is $1,682, can you afford an extra $200 toward your debt each month, for a total of $1,882?
If you answered yes, and continuing with the example, add the extra $200 to the minimum amount of your first priority card, and enter that amount in the top of column 2. For the remaining cards, enter the minimum amount in column 3.
Each month, pay the minimum amount, plus $200 on card 1, and the minimum amounts on the rest of your credit card debt. Once you pay off card 1, take those funds and add them to what you are paying on card 2.
Because you made a commitment to pay $1,882 each month toward your debt, you will always add the total payment from the creditor you just paid off to the next creditor on the list. When you reach your last creditor, you will be paying the full $1,882 to that creditor each month until you no longer owe anyone!
A word of caution: This method works, IF you stop accumulating more debt. You must change the habits that got you into debt, by managing your spending and not spending more than you are earning.
If you need additional assistance establishing a budget and paying off your debt, let us help. Contact MMBB Financial Services at 800.986.6222 and ask to speak to a Certified Financial Planner Professional, or send an email to email@example.com.