No Credit Needed Debt Reduction Guide
Section One: Getting Started
Tools: pen / paper / calculator / most recent bank statements / loan documents / credit card statements
Calculate Total Starting Balance:
- List all of your debts – Create columns to list creditors, balances, due dates, minimum payments, and interest rates.
- Add up all balances – This amount is your total starting balance.
Determine Debt Reduction Method:
Now that you have your total starting balance, you no longer have ‘debts’, you have your ‘debt’. In other words, your new goal is to get rid of your entire starting balance, not just a part of it. With that in mind, there are two debt reduction methods that work really well – and they both share the same basic principals – making minimum payments to all accounts and making extra payments to one account at a time.
- If your goal is to pay the absolute lowest amount of interest, over the time that you are reducing your debt, list your debts by interest rates, starting with the highest interest rate first.
- If your goal is to rapidly reduce the number of accounts that have balances, list your debts by balances, starting with the lowest balance first.
It has been my experience, after writing about debt reduction for more than three years, that the latter method seems to work best for most people, especially when they first get started. I used this method, commonly referred to as the ‘debt snowball’ and it worked very well for me.
Begin To Make Extra Payments:
- Make minimum payments to all accounts on your list. Be sure that all payments arrive on time. Never miss a minimum payment, our you will have to pay penalties and late fees – and, your creditor may raise your interest rate.
- Send an extra payment to the first account on your list. While you may choose to simply add this extra payment to your minimum payment, and write one check, I prefer to send two checks, one for the minimum payment and one marked ‘apply to principal’. If you use free online bill pay from your bank, sending two ‘checks’ should be a relatively simple thing to do.
- Continue repeating steps 1 and 2 until you have paid off the fist account on your list.
Roll Payments Into Next Account:
And now we come to the most important step in the debt reduction process. Now that the first account on your list has been paid off – you have some ‘freed up money‘ – the minimum and the extra that you had been sending to the first account.
- Continue to make minimum payments to all remaining accounts.
- Send the ‘freed up money’ – the old minimum plus the old extra – that you had been sending to the first account – and send it to the second account on your list.
- Continue repeating steps 1 and 2 until you have paid off the second account on your list, then repeat for the third account, the fourth account, etc. until you are completely debt free. Remember, once an account has been eliminated, take the total amount you had been sending to that account – the minimum plus the extra – and send that amount to the next account on the list.
By repeating this process – eliminating an account balance and rolling payments to the next account – you can and will rapidly reduce your debt. Remember, your goal is to eliminate your entire total starting balance.
Thank you for reading the No Credit Needed Debt Reduction Guide.
You have been reading Section One: Getting Started.
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Section Two: Moving Beyond The Basics
Section Three: Preparing For Freedom
Re: …While you may choose to simply add this extra payment to your minimum payment, and write one check, I prefer to send two checks, …. If you use free online bill pay from your bank, sending two ‘checks’ should be a relatively simple thing to do.
More importantly, billpay programs from most banks are FREE! Save the checks (and cut down on number of times to re-order and get charged for them) by saving checks for when you “must” use them (legal-type payments, or to companies where you may need fast access to a copy of the canceled document).
Most billpay programs also offer a “gift payment”, so even that grad check to Jennie can be done without depleting your check stock.
I use the debt snowball (smallest balance first) method as well, though I’ll be switching it up after the next debt to pay off a 10% interest loan before a 6% interest loan. Very thorough explanation, I am sure it will help many!
This is great info and well explained, thanks so much! I have been doing this for the past three years and started out with six department store cards, 3 major credit cards, and an auto loan. I’ve paid off one of the major cards and closed it, paid off the car, paid off four of the department store cards, and this month will be able to pay off and close the last two department store cards. That will leave me with two major cards to pay off, only one of which I will keep and pay off in full each month if I use it, which I won’t. This method was so daunting at first but it really works. Time goes by whether we pay these things off or not, and they are betting on NOT, so you have to have a plan. Thanks!
For me it worked best to start with a smallest debt. When I got rid of it, I gained a lot of motivation to repay bigger ones.
Here’s a question: what if your highest interest rate is a mortgage?
We did an 80/10/10 deal, so we have two fixed-rate mortgages. The first mortgage (about $153,000) has a 5.875% rate, but the second one (about $18,500) is 8%. This is higher than my student loan or credit card loan interest rates. So should we be throwing our extra money at that loan instead of our credit cards? We’re not planning to sell the house anytime soon, so I have no idea if this makes sense or not. Thanks for any input!
@fitwallet – Hmm… That’s a great question. Stick around and I’ll write a post about it later this week…
NCN
Great! I will definitely stick around 🙂