If you’re like most Americans, you’re sitting quite comfortably in the middle of a big, fat pile o’ debt. According to Creditcards.com, the average American household has wracked up $14,750 in credit card debt which is accumulating an average of 14.73% interest, and that’s just the credit cards! That total doesn’t include car loans, mortgage payments, personal loans, student loans…the list goes on and on. If there is something to be purchased, someone will find a way for us to buy it on credit. Listen up, Average American Annie, we need to talk. Do you realize that it will take you upwards of 35 YEARS to pay that $14,750 off at the rate the credit card company would suggest? Of course, it will only take you 35 years if you stop putting additional purchases on your credit card until it’s paid off. Keep adding to that total and you, quite literally, my never pay it off. True story.
You might be wondering, “What’s the big deal? Who cares if I have debt as long as I have the money in my account to make the monthly payments?” Seems logical…as long as you can guarantee your future financial stability with 100% certainty. If Wall Street and fat cat bankers have taught us nothing else, we should be well aware by now that the stability of our economy is never guaranteed. While we can’t predict the rise and fall of the stock market or its ensuing consequences and we may not know when a disability or lay-off will cut our income in half, we can set up our own personal economy to be as resilient and prepared as possible to weather the financial storms of life. One of the biggest ways we can do this is to ditch the debt.
Debt steals your options. Debt presumes on your future. Debt enslaves you to your creditors and your stuff. Debt blurs financial boundaries and feeds that ugly entitlement. But, is all debt considered “bad” debt? When I refer to debt in this article, I am talking about what Mary Hunt considers “stupid” debt. Stupid debt is unsecured debt. When you buy a house with a mortgage, for example, the mortgage is considered a secured debt because if you fail to make your payments the bank will take your house as payment for the loan. An unsecured debt is acquired when you use credit to pay for something of depreciating value that cannot be used as collateral for the debt. A depreciating item loses its monetary value the minute you purchase it and the creditor does not consider it of any value for paying off your unsecured loan. For example, if, after a year, you realize you need cash more than that big screen TV you just had to have, you can’t turn it in to the credit card company as payment toward your total balance due. Its value has decreased or depreciated and Visa wants their money, not your old outdated electronics.
If you need a dose of reality about your depreciating assets, just catch an episode of the A&E show Hoarders. Each person on the show may be hoarding something different but the common theme is that they, tragically, placed much more value on their stuff than it was worth. You may not be considered a hoarder…yet, but that doesn’t mean that you’re in the clear. If you are using credit to buy things because you don’t have cash on hand to pay for it, you are walking dangerously close to the edge. By paying off and staying out of stupid debt you will improve your family’s financial future tremendously. It’s time to step away from the edge. If I’ve convinced you that allowing Visa and Mastercard to foot the bill is not in your best interest then stick with me as I lay out the tools that Mary Hunt suggests in her book Debt-Proof Living: The Complete Guide to Living Financially Free 
According to Hunt, there are four simple rules to getting out of that revolving door of credit card debt:
- Stop adding new debt. As I said in the first paragraph, you will never get out of credit card debt if you keep adding to the balances every month.
- Pay the same amount on your outstanding balance every month. Ignore those deceptive declining monthly minimums. They lull you into a false sense of security so that you won’t realize that your balance isn’t budging. From now on, you will pay a fixed amount on each credit card bill every month until they are all gone.
- Line up your debts according to the number of payments required. For each debt, determine the number of months that it will take for the balance to finally reach $0 if you don’t add any new purchases to the card. This can be a bit tricky when calculating the interest charges. However, there are several sites online that offer free debt-repayment calculators, such as CNN Money and Bankrate.com. These calculators will take into account your total balance, the minimum payment and your interest rate when calculating the amount of time it will take you to pay off your debt. For a small annual fee, you can have unlimited access to all of the calculators at Debt Proof Living. I highly recommend the Rapid Debt Repayment Calculator on their site. It will generate a personalized chart of declining balances that can be printed and hung on the refrigerator as motivation to keep on track.
- As one debt is paid off, redirect that payment to the next debt in line. This is also known as the snowball effect. The idea is that you will always pay the same grand total on your combined debt every month. However, once you pay off a debt you will simply add that payment to the next one in line. For example, let’s say you owe $10,000 total on your credit cards. Debt #1 on your list to be paid off has a monthly payment of $100. Once you have completely paid off Debt #1, you will roll that $100 per month into the payment of Debt #2. So, if you have been paying $150 per month on Debt #2, once you pay off Debt #1 you will roll that $100 amount over and begin to pay $250 per month total on Debt #2.
Using the rules listed above will dramatically decrease the amount of time that it takes to pay off your debt. With this method, Average American Annie’s credit card debt could be paid off in one quarter of the time it would take to pay it off using the conventional schedule recommended by your not-so-friendly neighborhood credit card company. If AA Annie is able to plug leaks in her budget and find more money for her bottom line, she may even slash that time further. Be careful, though, it can be exciting to watch your debt disappear and you may be tempted to divert money from your savings or giving to get rid of your debt faster. This can be disastrous. The savings is vital to ensure that, in those inevitable emergencies, you aren’t running to your credit cards to bail you out. Remember the lesson of the tortoise and the hare – slow and steady wins the race.
Now that you have the tools, it’s time to make the change. Any dead fish can go with the flow; it takes a strong fish to swim against the current. While this course won’t be easy, I promise you from personal experience that it will be so worth it.
For more articles in our Taking Control of Your Finances series, check out the Finance Mom section of our website.
Kim is a Worship Pastor’s wife and full-time mom to four crazy and beautiful kids. Toss in a part-time job, housework, a blog (http://www.fishbowlliving.com) and what passes for a social life these days and she’s still wondering how she fits 32 hours into a 24 hour day.
