Many years ago, I got myself highly in debt. Being young and not really understanding credit, while personally funding various business ventures, it all came crashing down on me at the sum of $25,000. That is when I decided that I needed to get myself out of this situation. Such debt creates over $4000 of interest alone per year. I knew I couldn’t let this go on, so I figured out a plan to repay this debt effectively and as fast as possible.
Repaying the debt became my main priority until it was fully paid off. So everything else became secondary. I believe that this is the only possible mindset to ensure that you repay your debt efficiently. Here is the break down of my debt:
Line of Credit: $10,000 at 8%
Visa: $6700 at 12.9%
MasterCard: $5800 at 18.5%
American Express: $2500 at 19%
Now let me give you some tips that helped me pay off this debt:
Stop piling on more debt
As I mentioned above, your main priority needs to be paying off the debt in full, and everything else is secondary. Therefore, you need to change your lifestyle completely. You need to create a budget where part of your income will go to pay for necessities, such as rent/mortgage, food, and the likes. Everything else that you do not NEED, is potential money that can repay your debt, which is your main priority. So a lot of things have to go. I suggest you read up Thomas’ post 6 Simple Tricks On How To Save Money.
Pay as little interest as possible
As you start to pay off your debt, it is crucial that you set up your debts to be in the most economical position. Shift your debts around so that you pay as little interest as you possibly can. For example, I was able to get a $10,000 credit card with a 0.99% introductory rate for the first six months. You see, I always made sure I made my minimum payments on time, I actually had very good credit even when I was this highly in debt. Please read my article How To Have Good Credit to get some insights on the subject. So I transfered $10,000 of my debt to this card and saved $1500 in interests for those six months. This means that I paid off my debt quicker than expected since that $1500 saved went into payments. With the $10,000 I freed on my other cards, I shifted the remaining balances in a way to have the lowest interest % overall.
Use credit card competition to your advantage
When I cleared my Amex and MasterCard balances to transfer to my new low interest card, within a few months, I started receiving offers from these two companies about a low interest balance transfer option. They had offered me 3.99% for 6 months. You can actually call them up and inquire about such offers. It would be much quicker that way. Then once I transfered some funds from the Visa onto these new low interest options, Visa in turn offered me a 1.99% balance transfer for 6 months. In the end, over the 18 months it took me to pay off the debt, I barely paid more than 3% in interests. That’s about $750. Basically, only $40 a month went to pay interest, the rest was paying off the capital, and that is why it was paid off that quickly.
Pay as much as you can
For that 18 month period, I would almost give my entire income into paying off the debt. I lived on as little as possible, as I was determined to get myself out of this debt. What’s interesting is that you feel really good each month as you see the number go down. As you see your debt get smaller, you can start to see the light at the end of the tunnel, and that is such a huge stress relief. It was like a countdown, and I knew the end was coming soon. Once you reach that last payment, you literally jump up and down in joy as it’s finally over. Your persistence and desire to be debt free will guide you through this. You simply have to keep your discipline intact every single month and pay off as much as you can.
A very frugal life
For that year and a half, I did not travel, I did not buy a new TV or a new computer, and I did not buy new clothes or new shoes. I rarely went out to eat at a restaurant, and stopped using a cell phone. I kept my spending on entertainment to a bare minimum and just focused on working, making money, and paying off this debt. The reality of it, is that paying off a debt takes over your life, and that’s what you have to go through to finally be free from it. I knew that this frugality was absolutely necessary, and it helped tremendously in paying off the debt as quickly as I did. For example, getting rid of cable TV was $800 a year saved. Avoiding costly restaurants saved me about $700 a year. If I were to add up all these savings, I would have to say that it helped pay off about $6000 of the $25,000 I owed. I probably saved an extra year in payment just by being this frugal. Looking back, it was definitely worth it. Now, I know some people might think, “oh I can’t live without this or that!”, but the way I see it, getting yourself in debt in the first place was a bad personal decision, so the small price to pay to get yourself out of it permanently is nothing compared to what you gain in the end.
No matter what your debts look like, I firmly believe that you have the ability to pay them off in a timely manner. You need to take a close look at your finances and figure out a re-payment plan, and stick to it no matter what. You will have to make a lot of sacrifices, but believe me, life is much sweeter once you are completely debt-free!
I find that getting yourself out of debt is the same as kicking an addiction to the curb. We are “addicted to credit”. I applied the same mental preparation as if I was fighting off an addiction. You have to say “no more”. You have to make that decision, and never look back. Then, you have to battle it daily by being frugal and living within your means.
Once you are fully out of debt, it is very important to continue the discipline and responsibility that you expressed during the time that you paid off your debt. I have known many people that went right back into debt because they think it’s “carte-blanche” for them to turn back to being irresponsible and living beyond their means. Good financial discipline is something that needs to be applied your entire life. Do not purchase it if you cannot afford it. It’s a simple phrase, but if you live by it, you can change your life completely!