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JLP at All Financial Matters recently shared the story of how he got out of credit card debt. It’s not exciting or glamorous, but then paying off debt never is.
We paid off our last two credit cards nearly a year ago. It was an amazing feeling to write those two final checks. Our debt came mostly while we were in college. We also stupidly charged up stuff right after college. Most of our debt came from over-indulging. Now our only remaining debt outside of our home is our car and a furniture purchase, and both of those will be paid off in June.
JLP did this by:
- Taking advantage of 0% interest offers, which allowed every penny paid on the debt to go to principal.
- Paying his bills on time.
- Paying more than the minimum due.
- Most importantly, not using the credit cards to acquire more debt. “Nothing will make you feel more helpless than to get your credit card bill and notice that you charged more than you paid over the last month.”
Matildaben, who previously shared her story about buying a part at the junkyard, dropped me a line the other day to say, “I paid off my car loan today!”
I got my paycheck auto-deposit notice this morning in my email, and as I usually do, I went straight to Quicken and my online accounts to make payments to the things that need paying to. My car payment is about $219 a month (the loan is from the credit union, the original cost was $5,000, which I spread out over 24 months). The amount left on the loan was about $450.
Usually I put the part of my paycheck that gets split into my credit union account right into savings, but I noticed that the interest rate on the loan was about 4 percent and change, and the interest I was earning on savings was under 2 percent. So I paid off the balance of the car loan with a quick online transfer. The difference in interest rates is only a few bucks, but now I get the psychological satisfaction of knowing my car is paid off!
I think these two stories are awesome. These are the sort of small psychological triumphs that getting rich slowly is all about.
For myself, I can finally see the light at the end of the tunnel. My goal is to have all of my non-mortgage debt paid by the time I turn 39 in 396 days. (I’d really like to pay it off by the end of this year, but I recognize that’s a very ambitious plan.) When I finally do get my debt paid off, I’ll have to throw some sort of “debt elimination” party. (Maybe a first-ever Portland-area GRS “frugal fest”?)
If you have a getting-out of-debt-story, please don’t hesitate to leave a comment or to drop me a line. It’s inspirational stories like these that keep me motivated!
This article is about Credit Cards, Debt, Real-Life Friday, 23rd February 2007 (by J.D. Roth)
February 23rd, 2007 at 5:38 am
Oh yes, I most certainly have a debt story. I worked for a debt makeover TV show and in order not to feel like a hypocrite asking people to put their debt out there for the nation, I signed my husband and I up to have our own informal, non-televised debt makeover. I honestly thought we were “not like those people.” I was wrong.
There is most certainly light at the end of the tunnel. We’re attacking the highest interest debt first, plus putting a good percentage into savings. As we’re both freelancers, this is essential.
For variable expenses, we live on cash only, divided into categories such as transportation, clothing and food. When the money for the week is gone, it’s gone. It’s tight, but in 15 months we’ll be debt free and on our way to prosperity.
February 23rd, 2007 at 6:13 am
When I finished college in the mid-90’s, I had about 30000 in debt (20k student loans & 10k in CC debt. I was adding to my debt (I did get a job right out of college but it only paid upper 20’s) and not budgeting. Way back then the intratubes were just getting to be quite popular and I read a funny little section of AOL on personal finance (the Gardner brothers or Fool.com) that got me to pay attention to my own finance.
It took me three years of scrapping to pay off the debt. The final payoff month was a liberating experience. I took half of my normal debt payment and threw a big (for me) party….and I took the other half and started my Roth IRA. Several jobs later and with much bigger salary, I am still living like I did in those payback days but my personal net worth is soaring.
But I must say breaking my first non-house 250,000 networth still did not produce the same feeling of satisfaction as becoming debt-free.
February 23rd, 2007 at 6:17 am
I had a debt last year running into several thousands. I was paying in between 12-15% in interest. I borrowed money from two friends of mine and paid the cards first. Then I slowly repayed my friends back. Only that I gave them half of the interest that I was paying. This worked like a magic. Also, the cards cannot be paid off until you stop using them. I used my debit card for a while.
February 23rd, 2007 at 6:29 am
Inspiring stories, indeed! I reached the debt-free milestone in December 2002; my net worth graph from January 1997 to December 2002 charts my debt odyssey. I had very little income going into 1997 as I was working as a freelance writer and part-time environmental educator, and I used my credit card to pay for everything from food to rent. Then my car died and I took out a loan for a newer one and racked up more credit card debt in the meantime. But I got a steady, well-paying freelance gig that then turned into a fulltime job, so my income went up and I worked steadily to pay off my debts as quickly as I could while also contributing toward my retirement. The big reduction in debt came when I moved to Montreal from Vermont: my rent dropped from $850/month US to less than $550/month Canadian and I sold my car because I didn’t need one living in the city. Once that happened I was able to pay off the rest of my debt quickly and start saving serious money. I’ve stayed completely out of debt since then and it feels great!
February 23rd, 2007 at 6:32 am
One of the people mentions in the article says that paying off the car rather than putting the money into savings gives “psychological satisfaction”. I’ve also heard this spoken of when talking about the modified debt snowball, where the lowest balances are attacked first instead of the highest interest. I’ve been thinking about this method alot lately, and I think the benefits to doing this are more than just ‘psychological’.
Someone might tell you that the logical way to pay off your debts would be to pay off the highest interst loans first, but I think there is definitely something to be said for the cashflow that is generated by paying off the smallest balances first. It gives you breathing room.
Off the top of my head, If something comes up next month, like a car repair or what have you, and you have no emergency fund, having that extra cashflow can mean all the difference because it might mean you don’t have to take out more debt to buy groceries AND pay your bill. This is definitely more than a just a “psychological feeling”, and to me it seems like a better explanation to the logical types who say pay the higher interest first.
Sorry, that was a little off topic. Just something I’ve been pondering lately.
February 23rd, 2007 at 7:25 am
Here is my example, and it is also not sexy. I had two cards. I called a debt consolidation company called Ameridebt. They closed both cards and had the interest rates reduced to about 6%. From there it was a matter of making 36 payments of around $400 monthly. There was also a $5 monthly service charge. At the last payment I called to make sure the account was complete and the person on the phone at Ameridebt said in their 3 years at the company they never met anyone had completed the program.
This was 6 years ago. Other than mort and car loans I have never used or needed a credit card again. It is the best thing I ever did from a personal finance context.
February 23rd, 2007 at 7:39 am
icup, I’m in your camp.
I think it’s far more than “psychological satisfaction” that works in your favor when you knock out smaller debts even when there is a bigger interest payment (and hence the math looks “bad”). It definately frees up cash flow, and it does it quicker.
For example, if I have a $4000 balance at 0%, and a $7500 balance at, say 10% — I have a much lower payment on the $4000 balance AND every dollar is going to reduce it absolutely. I can pay that $4000 faster and then devote that money to the other card, or use it otherwise if I need to.
Personally I paid off my car first, even though it had the lowest interest rate at the time. It also had the highest payment, and my greatest fear was being laid off again while I had that car loan (I had been once and barely managed not to miss any payments on the car). It was a sweet, sweet day when I got that car paid off, and every credit card that I pay off is like a mini-liberation day.
That said, I have managed to set a few thousand in savings too and there is a different psychological benefit there. Paying off debt is a release, but having that money in savings is like a calm, warm day at the beach.
February 23rd, 2007 at 8:29 am
Sure, I’ll let loose with a few details. My Mrs. and I have been following a loose interpretation of Dave Ramsey’s plan. By the end of month 1, last Sept, we established a budget, sold a few things and established our $1000 emergency fund.
We started with $15000 in debt. Now we are 6 months in and we’ve experienced a $1400 car repair. Nevertheless, we have paid off over half our debt and are well on our way.
When I said loose interpretation, I mean that we aren’t paying things off in a strict lowest-balance to highest order. We started by paying off the lowest balance that charged interest: Sallie-Mae. When that was paid off, we wrote the name on a balloon and popped it.
Now we are paying off the second debt. It had the highest balance and the highest interest rate. Next month we’ll have the Discover paid off.
Last night I added a quick formula to my Excel-based budget. On average, we have sent just over 50% of our income to our creditors. This while having a daughter added just before we started paying down our debt.
February 23rd, 2007 at 9:31 am
When my wife and I got married in late ‘02, we had over $40,000 in debt between the two of us. The vast majority was school loans (both low-interest government programs and no-interest from relatives). Through frugal living, we were able to pay off the entire amount in less than four years, on only one income (which was below the median household income for our area for much of the time).
Granted, low-interest & no-interest student loans are not a high priority to pay off for most people, but it’s hard to beat the feeling you get from being 100% debt-free, with growing balances in your accounts every month.
On a slightly tangential topic, I wonder if you or the other readers of this site have any thoughts about some of the suggestions in the comments on this thread. Specifically, some of our local real estate “professionals” are suggesting that paying off one’s mortgage is a bad financial move, and should basically be delayed as long as possible.
February 23rd, 2007 at 9:33 am
My story is a bit like that, but I luckily never got into deep debt. In fact right now my credit card only has 500 dollars on it and will be paid off soon. In the last few months I’ve probably paid out 6k on my credit card, but that’s my only credit card debt.
I still have a car payment, which I’m overpaying by about double. If all goes well I should have the car paid off a couple years ahead of time. Also, due to how they are billing me, if I’ve paid an extra payment they move the next payment back a month (i.e. my October statement is due in December, not November).
This allows me, once I’m far enough ahead, to be able to simply have a month free of car payment if I absolutely have to. I know it’s not a good thing to be doing often, and shouldn’t have to at all, but I know it’s there, just to be safe.
My goal (which is in site) is to be able to put a whole pay check each month into savings.
There’s more to the story then this, but that maybe better for a post on my Live Journal.
If you do throw you first-ever Portland-area GRS “frugal fest”, I may drive down from Seattle to go. It’s not a long drive, and I get good mileage.
February 23rd, 2007 at 9:39 am
Oh one more thing…
Has anyone seen the movie/documentary Maxed Out? I saw the trailer for it at the local cheap theater the other day. It looks pretty interesting, although it definitely seems skewed toward laying all the blame on the credit industry, and little to none on the consumers that willingly take out more debt than they can handle.
February 23rd, 2007 at 2:22 pm
Gentle reader,
I am feeling inspired by this site… it makes me feel good that you all are taking charge of your financial lives. Briefly, I have a story too, but I have always been a miser so I am probably in the 6th sigma of the bell curve. I started college with a GED and it took me 10 yrs to get the degree I wanted… all personally financed with as few loans as possible. I graduated in 1990 and jobs were not plentiful where I was living. I took a job in a small town 30 miles east of the college I attended, stayed in the same cheap house where I was living and drove the same ’81 Toyota for a while longer. I opted to max my savings (401K and emergency funds)… some mutual’s, some stocks… some cash. I had about 7K in dept but no CC debt since I never got one.
I now am married (2004) with one child… 16+ yrs after graduation we (my wife had 10K in debt when we committed (who contributes almost 100K to our pie) now have a net worth of a bit over 1M. No big stock options… no inheritance… all being very careful, and thoughtful about the money we spend. We did live in an airstream trailer for 2+ years while I built our house (paid for) and I value it at ~360K. The rest of our money is in 401Ks, stocks, and cash. I was laid off last yr and spent a year with my baby; my wife is now keeping the kid… we are at 55% of our income from two years ago… (I never made more than 74K per yr and I am currently working in a less stressful job making 65K)… i.e., you guys can do it too.
Recycle, use it up, wear it out, make it do or do without… you have to be much more creative that way and who really wants corporations making money off us? We eat out often, spend too much on wine, one of us drives a nice Honda (I like my ’69 P1800 personally), we don’t wear rags… but we don’t spend much on unnecessary clothes either… what I’m saying is we are not the old strange couple that will die and leave millions to some charity (well that would be nice too).
On the credit card note, I was thinking today that I have not carried cash in weeks. We typically only use cards and pay off balances in full. (You can track and adjust your spending that way).
I do not advocate my lifestyle to anyone but perhaps knowing that by living within your means and paying of debt while saving… you really can get rich slowly.
Good luck,
Michael
February 23rd, 2007 at 2:43 pm
Ok so wife and I are in sales. Decided to “drop out and tune in”.
14K in card debt - gone in 6 moths.
We just lived like we did when we were in college. Dollar movies, nights in, mac and cheese, etc.
The neat thing is we had a BLAST doing it. It was fun to take a break from all the junk that clutters our lives.
The kicker is we have both hit every bonus 100%, and I have MAXED out my yearly bonus of 100K! Just by focusing. - There goes the last car debt and funding our baby’s college education!
It can be done and it’s not really that hard with the right teamwork!!
February 23rd, 2007 at 9:22 pm
The Tim:
I think the people (experts?) who are saying not to pay off a home mortgage early can follow their own advice, but you’ll save a lot of money in interest by paying off a house early (same with a student loan).
I’d say, yes, these are “good” debts so while I won’t let them stress me out to the point that I’d stop saving so I could pay them off at the earliest possible moment, I’d also work to get them paid off early. The best debt is no debt.
February 23rd, 2007 at 9:40 pm
We’re not out of debt yet, but we’re getting closer.
We paid off the last credit card bill in September 2004 and cut it up. We haven’t had a credit card since.
This month we paid off the car. All we have left is my student loan, the HELOC (aka our 20% down payment, aka we’re too broke to buy a house) and the mortgage. It’s a lot left to pay between the student loan and HELOC, but the progress so far is encouraging!
February 24th, 2007 at 9:46 am
Hi I dont know if this is relevent but I (We) husband included are in so much debt I dont think there will ever be a way out. Until recently we were doing ok then things changed and we couldnt afford the bills. We have gone into a debt management plan but are both in our mid 50s who would have thought this could happen. I am keeping a diary in the form of a blog at http://www.howtosortyourdebtsout.blogspot.com We have gone to a debt management company but with what we can offer it will take us 57 years to pay the debt off, if the worry doesn’t kill us before I think our age will
February 24th, 2007 at 4:21 pm
oh Hanna!
Don’t despair. If you haven’t already, go to the library and check out Dave Ramsey’s book The Total Money Makeover. Sit down with your husband and read it together.
I read your blog — it’s never too late to start applying DR’s plan to your situation even with the help of the company you contacted. Just don’t give up hope! You are not alone in your struggle.
I am going to link you to my blog at http://www.debtblitzkrieg.com — feel free to visit me over there any time and let’s beat our debt together!
February 26th, 2007 at 7:05 pm
I had a about $4000 in credit card debt. First, I rolled all of it into a new, “no interest for one year” credit card. I also opened a savings account that earned 4.5%. I made sure to choose the highest interest savings account I could find and a credit card that had rewards I could use.
Next, I determined how much per month I would need to pay to have the card paid off at the end of the year. After adjusting my budget to allow for this new bill, I paid just a bit more than the minimum to the credit card company every month. The rest I put into the savings account. At the end of the year, I had enough to pay off the card with a little extra (the savings account interest) for myself.
February 28th, 2007 at 2:29 am
I don’t have the amazing stories of pulling out of debt by changing my entire lifestyle, exactly.
When my husband and I met, I was in debt to the tune of about $6k and miserable about it. I’d given up the dream of owning my own house and had moved back home to Texas rather than face being homeless (again).
We met, got married, and then I deployed to Iraq. During that time, we paid off all my debt, all his debt, and threw a very nice church wedding, all of it paid for in cash.
During my husband’s deployment (we missed each other in Kuwait by 10 days), we bouth seven+ acres in the Hill Country of Texas, and I’m currently in Germany on our second honeymoon. (The first was spent in a hospital, with my darling husband damned near dead from a kidney infection.) He’s stationed in Germany, so it’s not been as expensive for us, but then, we’ve only put the plane tickets and the guest housing room on the credit card and fully intend to pay that off in full when we get back home.
The psychological benefits from being able to pay off our debts and now, to be able to seriously say “We can pay off $3k in travel expenses” when we get home have been…incredible.
I still have some leftover worries, and I’m obsessive about my credit score and my bank accounts, but I can do anything. Not only did I pay off all my debts, I did it while being shot at, blown up and taking some rockin’ photos for the US Army.
April 4th, 2007 at 1:04 pm
I was kind of forced into being frugal and paid a great deal more attention to my debt profile when I lost my job about 17 years ago. At that time, my wife and I had just purchased an old single family home for two years and our boy was starting college. With only my wife’s income, and my hurrily setup home business, our lifestyle had to undergo a 180 degree change. Quickly, I took out all my deferred compensation and cancelled two savings accounts and with $60,000 we paid down the mortgage and knocked off the PMI, and refinanced the mortgage from 11.5% for 30 years to 7.125% for 15 years. The monthly house payment was reduced from around $1600 to $900. Money was still tight and much of our previous lifestyle had to be curtailed. We cancelled all but one credit card for emergencies only. The rest of the time, we were on a cash basis. We saved on every front — wore warmer clothing on colder days and turned down the heat, used store coupons when necessary, eliminated dining out completely, took “working vacations” to repair the house… When we really needed some storm windows, we took advantage of a one-year no interest plan but paid off that balance before the year was up. We finally paid off the entire mortgage loan in 14 years and one month and let me tell you, the feeling of entirely debt-free was an experience out of this world. I recall myself and my wife counting every payment in the 12 months leading to paying off the house loan. Every time we made one such payment, we congratulated each other in genuine delight. We were so very proud of ourselves! When the day came to send out the final payment, we actually were so happy that we cried and embraced. Yes, we cried and told each other that our burden was finally over. Looking back, all our sacrifices and hard work had paid off. Now, we own this house free and clear, all $550,000 of it at today’s market value. We have also saved up $140,000 in my wife’s deferred comp. We are a little late in other departments but a good start nonetheles. We have had Roth IRA’s for the last 3 years. We have purchased some municipal bonds. If something needs to be repaired in the house, it does not need to be postponed. We can eat out, though the frugality over the last 17 years has become a habit. Our 18 year old car is still running well, although a new car will be a great replacement. Visiting Europe, Asia, South America… and places we have dreamed of touring… will all become reality. Sweet! We just feel freer, happier with little stress. We also know that today, and tomorrow, and the days and months that follow, we will still have two incomes and before we retire in about 10 years, we probably will become millionaires. Our retirement will also be money worry-free.
January 11th, 2009 at 11:27 am
About this time last year, I started looking into eliminating our debt (approx. 20k between credit cards, line of credit, car and schools loans). We’ve usually paid more than the minimums on the cards and always paid more on the line of credit. And though I’ve budgeted for years, but we haven’t tried to spend less than we earn until last year. Plus, once we had our credit cards, we’ve used them, with some restraint, but never paying them off each month.
Around that time, our 18 year old son attended the classes for Dave Ramsey’s Financial Peace University. He introduced me to the debt snowball concept. With that tool, I realized that we could be out of debt within a year. We were close to having all the credits cards paid off within a few months. We also began establishing an emergency fund and switched banks to one with high interest yield checking accounts.
However, we decided in early summer to purchase and renovate a single wide trailer. We had close friends in a trailer park 20 minutes away from us, farther away from our work. On the lot next them sat a trailer that had been abandoned for 2 years. We took a look at it, and though it was in an abysmal condition, we saw potential. My husband has experience in the construction trades and neither of us was afraid of the hard work or learning about the things we didn’t know. So we bought it for $500 and took our getting out of debt plan on a detour. We maxed out all the paid off credit cards and took out a small loan. Our debt snowball melted, though we continued to pay more than the minimums. We spent 11 weekends getting our home into a livable condition- new plumbing, sub-floor and floor, completely remodeled the kitchen and master bath. We were fortunate in who we know and that we were able to replace the doors and windows at a severely reduced cost from a misorder boneyard. We’ve done all the work ourselves. (you can view our progess at http://www.myspace.com\thedellingers)
Now, our rent and water bill is less than 40% of what it used to be. And even though we live farther from our jobs, our fuel cost is the same because we no longer drive in town (we also carpool).
We still have a bedroom and bathroom to redo, but we can both resume and increase our debt snowball and pay for the remaining supplies and materials with cash.
We’re recently paid off the first of our credit cards.
Now that we’re back on track though, I have one question. Is it better for our credit rating to pay one large lump sum each month or to make multiple small payments throughout the month? We’re attacking the highest interest rate now that we’ve paid off the smallest amount and want to make sure that we’re not impacting our credit rating negatively by doing so the “wrong” way. We are both paid weekly and so I chip away at the balance by setting up small weekly automatic payments as well as making a regularly monthly payment that is larger than the minimum.
On a side note, I just have to say that your blog is wonderful! Whenever I feel stressed or feel like I’m getting off track, I open your blog and read and surf to my heart’s content. :)Thank you!