By Scott Cook
In the beginning, activating that new Visa or MasterCard seems like a great idea, doesn’t it?
You open up your world to all kinds of awesome and new buying possibilities. You also open your world, as you soon realize, to every credit card company offer that can be stuffed into your mailbox. Before you know it, if you’re not careful, you’ve got 1,589 cards trying desperately to blast their way out of your wallet or purse.
In many cases, even with just a few cards, the balances can grow to voluminous proportions that make opening that statement a lot less fun than the spending that proceeded it.
In fact, did you know that in the U.S., the average household has a credit card debt of $15,300 as of 2014! This represents a monthly payment of about $300 to $500 or more, depending on the interest rates involved.
Yikes!So what’s the solution? How do you reduce and eliminate this debt quickly and forever so that you can either go out and buy more stuff, or open new lines of credit to buy more stuff? After all, that’s what you have to do in today’s economy… or so it seems.
Let’s look at a simple and effective technique to completely turn those big balances into nice round zeros.
This is a short article, so I can’t go into all the detail. For this example, we’ll use a very simple model. Let’s say that you have two credit cards – a Visa and a MasterCard that look like this:
Visa balance: $3,000
Interest rate: 24%
Minimum payment: $90
MasterCard balance $2,500
Interest rate: 18%
Minimum monthly payment: $63
Total monthly minimum payments: $153
Okay, so how do you pay these off? If you pay only the minimum each month, it’ll take you somewhere in the neighborhood of 8 years or so!
That’s not so quick, is it? Don’t panic, though, there’s a better way. Of course, like most things involving money… it’s going to take a little discipline and sacrifice. Sorry, but that’s the deal.
Let’s suppose that you are able, by semi-strict budgeting to come up with $200 per month extra that you can add to your credit card payments. Here’s what happens.
You pick the card with the lowest balance, in this case your MasterCard, and add that $200 to the $63 each month. You continue paying the Visa minimum just like always.
Now, how long is it going to take to pay off that $2,500 by paying $263 each month? It’s going to take about 11 months!
Amazing? Unbelievable? What about interest?
Not really. You see, with that much extra going toward the principle of the card’s balance, the interest is almost entirely irrelevant, as interest is calculated monthly. So, after your 11th payment or so, you now have a MasterCard with a $0 balance, and it’s time to move onto that Visa.
Now it really cascades. You take that $263 you were paying on the MC and add it to the $90 for the Visa making your monthly payment $353.
Once again, how long will it take to pay off a $3,000 balance? About 8 months or so. Partly because that $3,000 balance is a little lower after 11 months, and because you’re putting so much into principle buy down.
So, after only 19 months, or slightly over a year and a half, you’re totally credit card debt free!
Oh yeah, and you now have $353 each month to do with what you want, be it put it in savings, invest some or all of it or use it to add to your car payment and mortgage.
This cascading debt system can be used to pay off anything, and many hard working folks just like you have gotten out of all debt, including their house payment in as little as 7 years.