In part one I talked about setting priorities for myself and finding a more narrow focus on them so I wouldn’t be overwhelmed. In part two I talked about making a budget and I walked you through what my budget looked like, both before and after the move to my parents house. In this segment, I’m going to get to the meat of the entire series: How I Got Out of Debt.

My Strategy

Once I got the budget down, I went ahead and started working on how I was going to pay down my debt. If you recall from my last post, I was putting $167.88 towards my credit cards. Now, let me preface this by saying I have never been in extraordinarily high credit card debt, nor have I had to worry about losing my home. I have been extremely fortunate in that regard. However, as someone making $25,000 a year with $7000 in credit card debt, $24,000 in a car loan, and almost $15,000 in student loan debt, I can tell you I felt some stress. And I submit to you that anyone living beyond their means, whether large or small, is going to be stressed out. It’s not about who has more debt and more stress, it’s about finding ways to live within your means.

I say this because $7000 in credit card debt may not seem like a lot to you guys – some of you may have substantially more – and in fact, I’ve been accused on this site before of not experiencing what it’s really like to be in debt. However, as I mentioned, to me at that time, that was real debt. I was way beyond my means and ruining my credit. Irrespective of the dollar amount, I recognized the need for a change, and that was my goal.

# 1 – Gathered Statements

The first thing I did when I sat down to make a plan of action for this was gather my statements and review where I was. Here’s a snapshot of my debt back then.

- Capital One C.C. – $2564 @ 16%

- Providian Bank C.C. – $2400 @ 16.5%

- Aspire Visa C.C. – $560 @ 19%

- Target Card – $400 @ 23%

- Fingerhut – $1076 @ 18%

Incidentally, the Fingerhut card was perhaps one of my biggest mistakes. If you’ve never heard of them, they’re a mail-order catalogue. The trouble for me was that I found it very easy to rack up a lot of debt in a short period of time. That $1076 isn’t really representative of the total amount of money I was spending with this company, because I had been making payments. When I first got the card, it was small stuff here and there I’d purchase. Mostly things to feather my nest with, but then it grew into things I didn’t need but definitely wanted. And, because I was such a “good customer,” they continued to increase my line of credit with them. It was never-ending for awhile.

Anyway, armed with this knowledge, I called and spoke to my lenders to see if there was anyway to decrease the rates on these cards. As you can see, they were pretty high. I didn’t have any late fees or over-the-limit fees because I always paid the minimum, but the trouble was, with rates as high as these, I’d be paying just the minimums well into my retirement years and still not make any progress. So, my first objective was to see what I could do to lower the rates.

Capital One said that while they appreciated my business, they were unable to help lower my rate. Not altogether unexpected, but it was worth a try. I was going to close this card when I was done paying it off anyway. Then I called Providian, which wasn’t my favorite credit card to begin with, only to find out that they couldn’t lower my rate but that since my credit file had changed, according to their guidelines, my rate would increase. Lovely. So, Providian increased my rate to 18%. I immediately closed the card and said I’d pay the balance off as I could.

Aspire is the card that I’ve recently written about – they’re the ones that shut down my card and caused a major drop in my credit score recently. Anyway, at this time, despite being one of those “rebuild your credit” kind of cards, they were phenomenal to work with. This was also before they outsourced their customer service department. I called and asked if they could lower my rate and the woman I spoke to was kind enough to give me a discretionary 3% decrease. So, my rate went from 19% to 16%. That’s great, but at $560 not really a big deal. Still, I’ll take what I can get.

Next up was the Target card, which was just the store card I didn’t even use anymore. I went ahead and closed that out and they offered me the deal to pay half of the balance in full and they would take the other half. I had never heard of this and asked what the catch was. The rep I spoke to said it wasn’t a catch, it was a promotion they were offering to those who closed their cards as a preventative measure for default. At the time I thought that was very nice of them. Now I realize they just thought I wouldn’t pay. In any event, I went ahead and pulled the money from savings to pay it and knock it off my list.

Finally there was Fingerhut. I called them and asked them to lower my rate and they obliged. I went from 18% to 14.99%; however, they increased my rate along with that. I never really understood that. On the one hand, one bank was increasing my interest rate, while another was willing to decrease it and give me a higher limit. It wasn’t until later that I began to understand why this was happening. After I’d been in banking for a little while, I began to see what levels of risk certain banks were willing to take and which ones refused to take much risk at all.

So, my new list looked like this:

- Capital One C.C. – $2564 @ 16%

- Providian Bank C.C. – $2400 @ 18%

- Aspire Visa – $560 @ 16%

- Fingerhut – $1076 @ 14.99%

Even though I lost a little ground with the Providian card, simply by calling my lenders, I was able to get some of the interest rates lowered, and I got a good deal with Target to knock off half my debt with them, effectively wiping that one out completely – which also happened to be my highest interest rate.

# 2 – Ordered debts from highest interest rate to lowest

At this time, I wasn’t as financially aware as I am today. So, I had to do some research on what was considered the best way to pay down debts. I don’t think Dave Ramsey was very popular at the time – at least, not like he is today. Most of my research and what was recommended to me by my personal banker was that I order my debts from highest interest rate to lowest, regardless of balance. The snowball effect was then explained, and so that was my plan. I would order the debts from highest rate to smallest, pay the minimum on the smaller interest rates and applying the rest to the highest interest rate.

Here’s what that looked like:

- Providian Bank C.C. @ 18%

- Capital One C.C. @ 16%

- Aspire Visa @ 16%

- Fingerhut @ 14.99%

Ok, so most of you financially savvy folks probably see the error I made at this juncture. Because Capital One and Aspire were the same interest rate, I ordered them from largest debt to smallest – not what I would have done today. Clearly, it made more sense to get rid of the smaller debt quickly, as opposed to paying interest on it while I hacked away at the larger debt. Live and learn.

Once I had the debts ordered, the next thing to figure out was how I was going to allocate my money to this. I had budgeted $167.88 per month to go towards credit card payments, and I had $6600 I wanted to pay off. This also took place back before the government required credit card companies to increase the minimum payment amount to 2%, so my minimums were only 1% of the total balance due.

By now I hope you guys realize I’m a very visual kind of person so I wrote it all down. Here’s what it looked like:

- Providian $2400 @ 18% – minimum payment $24/month

- Capital One $2564 @ 16% – minimum payment $25.64/month

- Aspire $560 @ 16% – minimum payment $10/month

- Fingerhut $1076 @ 14.99% – minimum payment $10.76/month

They all had the clause that if the 1% was less than $10, the minimum payment was $10.

# 3 – Breaking down the snowball

The next thing to do was figure out how to make my $167.88 per month go towards this new plan I had. For me, the easiest thing to do was subtract out the minimums first, and then the remainder was sent to the creditor with the highest interest. For example, I added the $10.76 from Fingerhut, the $10 from Aspire, and the $25.64 from Capital One together for a total of $46.40. I subtracted that number from $167.88 for a total of $121.48. I would send Providian $121.48 every month while I sent the remaining cards their minimum balance.

Now, at that rate, the calculation was that it would take 24 months to pay off Providian. In reality, it took me less time. I was working in an “incentive” environment, which means I got incentive checks from sales every month. I deliberately didn’t include those in my budget because those were specifically going towards my debt. They averaged about $300 extra a month, which went to the credit card debt. I had Providian paid off in 6 months.

With Providian out of the way, I moved on to Capital One. Now my minimum payments to the other cards was only $20.76. I applied the $121.48 + $25.64 minimum payment + $300 incentive towards the Capital one debt. It took me another 6 months to pay off the card. I moved on. Up next was Aspire. Here I was paying the $121.48 + $25.64 + $10 minimum payment + 300 incentive. This one was knocked out in two months.

Here it was, 20 months after moving in with my parents and I already had the vast majority of my debt knocked out. My goal was to move out of my parents house after 3 years – that was the original deadline I had given myself. So, the next debt to finish paying off was Fingerhut. The payment to them included the $121.48, the $25.64, the $10, it’s own minimum payment of $10.76, and then the $300 incentive. It took me 3 more months to completely finish my credit card debt freeing up the $167.88 from my budget, and allowing my an additional $300 to put towards my emergency and moving out fund.

As a small recap, I was making $25,000 a year with regular expenses (albeit slightly cheaper since I was living with my parents) and I paid $7000 worth of credit card debt off in two years just by making a budget and sticking to it. Technically, the first six months I lived with my parents, I spent my time tweaking the budget and adjusting. I was making the payments, but not nearly as efficiently as I was doing when I started the snowball. It made a huge difference!

# 4 – Controlled my spending

Number’s three and four really go hand in hand, as opposed to one after the other, because in order for me to achieve the steps above, I really had to curtail my spending. I told you in part one that I didn’t sweat the small stuff, and that’s true. If I wanted the occasional DVD or dinner with friends, I did it. I wasn’t too worried about those kinds of things because they gave me an outlet. What I didn’t do; however, was pay off the debt on one card and then go run up the balance again. Once I paid the card off, I pretty much got rid of it. The only one I kept from this bunch was the Aspire card.

So, you have to be reasonable when attempting to pay off your debts. Your basic miscellaneous and entertainment expenses are the first ones people cut in order to add more dollars to their debt repayment. Like I said, doing so in my case would have added maybe $100 to my debt repayment. That’s a lot, but it’s also not likely that I would have consistently stayed with that, either. Instead, I chose to be honest with myself upfront and say that I knew I would spend that money, so rather than trying to convince myself I should put it all towards the debt, I set it aside for the miscellaneous and entertainment.

It’s a wrap

Just to let you guys know, the numbers above were a little skewed on the downward snowball because I had been paying the minimums. It wasn’t by a whole lot and the time frames were still the same, so I just left the original balance numbers in for easy illustration. I just wanted to point this out for those of you whipping out the credit card calculators. I just made the illustration easier is all.

At any rate, that’s how I got myself out of credit card debt. Once I was finished with that, I started working on my car loan, but not as heavily as the credit card debt. As of today, the only debt I have left is student loans. They’re deferred while I’m still in school, but I am making monthly payments towards the debt anyway. Hopefully they won’t be too bad when I finish school!

Related posts:

1. 7 Ways to Squash your Credit Card Debt
2. Top Ten Reasons to Pay off Your Credit Card Debt
3. 7 Ways to Stay in Debt Forever
4. The Debt Snowball Method: A Primer
5. Why paying the minimum due is a bad idea