Why Making Minimum Payments On Credit Card Debt Is Insane

Filed under Credit Card Debt, Inspiration by on December 21, 2009 at 7:13 am {no comments}

If you can’t write a check, you don’t have the resources like a 401k or equity in a home to pay off your debt, what can you do? Most people out there are just making minimum monthly payments, exactly what the banks want them to do.

The average client I deal with these days has around $40,000 in credit card debt. This is a lot of debt, on top of which they’re paying 20% to 30% interest. This large payment is really hurting their debt-to-income ratio.

Most of these folks are over half-way utilized. Many people are already maxed out, hurting their credit again on the third leg, (debt to credit limit ratio) and they’re struggling to achieve the holy grail of credit by making their minimum payments on time. Unfortunately, that’s a trap! There are a lot of false beliefs that keep people in this cycle for a long time. You’re basically trapped if you don’t get off of that treadmill. You will be on it forever, making those minimum payments.

What most don’t realize is even if they have perfect payment histories and a “great” credit score, if they’re over utilizing their available credit or have a high debt to income ratio, they won’t be able to get affordable financing for the things they really want (cars, homes, etc). Those minimum payments aren’t getting them any closer to these goals.

Minimum payments on $40,000 of debt with 20% interest are going to take you 60 to 70 years to pay off. That’s a long time, too close to forever. Even if you owed $20,000 with an 18% interest rate, you’re still looking at 30 years or more to get out of debt. Making minimum payments is only good for you in the very extreme short term to maintain cash flow.

The appeal to buying on credit is overwhelming. You can have a lot of leverage because you can buy a whole bunch of stuff with a small monthly payment. This allure is what has trapped most people in America and is causing the current debt epidemic.

Really, there’s an epidemic out there! There’s over $2.3 trillion of consumer debt.  The credit card companies are raking it in with little to no regulation on how they conduct their business (ie: interest rate hikes, penalties, fees, etc). This is not a small problem, and this is the trap you’re falling into when making minimum payments. There’s got to be a better way; unless you just want to be a slave to debt for the rest of your life.

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Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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Get Out of Credit Card Debt FASTER: 8.5 Tips to Find Extra Cash!

Filed under Credit Card Debt, Money Management by on December 2, 2009 at 7:23 am {one comment}

Do you have any kind of lump sum to put towards paying off your debt?

If you’re even a little bit concerned about your cash flow right now because it’s limiting some of your debt relief  options, then you may be curious how many of my debt free clients discovered a variety of creative ways to increase their cash flow to get out of debt faster, such as: (more…)

Debt Relief Options: Accelerated Debt Payoff Plans

Filed under Debt Payoff Plans by on January 3, 2009 at 7:32 am {no comments}

Instead of paying off your debt with a lump sum check, here’s another accelerated debt relief option which may be the next best thing.

It’s promoted by David Bach, Dave Ramsey or Steve Smith; pretty much any financial guru out there. It’s called an “accelerated debt pay off plan”, and goes by many names: “margin roll up plans”, “debt roll down plans”, the “debt snowball method” and the “DOLP method”. There are three main flavors of these accelerated debt relief plans, yet they all boil down to the same principles.

The basics are these accelerated debt relief plans are this: if you want to get out of debt as fast as possibly without any negative impact on your credit whatsoever, you just need to pay off your debt.

If credit is ultimately most important to you now, then you must cut your expenses to the bare minimum and put EVERY DOLLAR you can towards paying off your debt in an accelerated fashion in order to get out of debt ASAP.

Accelerated debt pay-off plans come in three main types. In each, you continue to pay the minimums on all accounts and all the additional money you can afford beyond this becomes the money you’re going to use to pay off your debt.  This is often called your “margin.” Your margin is then focused on ONE account at a time, the differences between the three types of accelerated debt relief plans is in which account you choose to pay off first…

The three different approaches to Accelerated Debt Pay-Off Plans are:

1) List your debts in order of the highest interest rate to lowest. Use your margin funds to pay down the highest interest account first (it’s costing you the most) until it’s paid off, then pay down the next highest interest rate account and so forth, until your debts are eliminated…

2) List your debts in order of the current balance, paying down the account with the lowest balance until it’s paid off,  (this can help your credit by showing open accounts with low to zero balances, improving your debt to credit limit ratio), then pay down the next lowest balance account, etc., until your debts are eliminated…

3) Take the current balance of each account and divide it by the minimum payment (= division number), then list your debts by this division number from the smallest to the biggest, paying down the account with the lowest division number until it’s paid off, then pay down the account with the next smallest division number, and keep going until you’re debt free…

Any of these three Accelerated Debt Pay-Off Plan approaches can usually get you out of debt in about five to seven years if you can afford to pay double or triple your minimum monthly payments, and IF you are committed to budgeting and putting as much money as possible into your margin. This can be less or more obviously depending on your total debt. It requires self discipline and long term commitment.

Each of these “accelerated debt relief”  approaches require paying significantly MORE than your minimum payments.  If you really get serious about it,  you could be debt free even faster by putting more money towards paying off debt.

You will have no negative affect on your credit with an “accelerated debt pay off plan.”

It’s a very simple idea but not a lot of consumers organize their accounts or payments in this fashion. People may put their extra money towards the largest balances, or take turns putting extra money throughout all of their accounts, continually paying interest on their entire debt profile. Instead of spreading your payments between accounts, the accelerated debt relief plan is a much better way to structure your payments and put your money to its best use to be debt free ASAP.

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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How & Why to Get Out Of Debt

Filed under Credit Card Debt, Inspiration, Money Management by on January 2, 2009 at 11:37 pm {no comments}

The first option you have is to whip out a check and pay it off, but if you’re reading this now that’s probably not an option you can pursue. There are possibilities you may not have thought of. You may be able to borrow against a 401k. You may be able to pull money out of your home through an equity line of credit or by refinancing and pulling cash out. You may have assets you can sell to come up with the lump sum amount to pay the debt off.

Overall, here’s the thing you want, to find a way to stop paying interest and start earning interest. Why is this debt such a bad thing? Debt is a very bad thing if you have to pay the interest.

Debt can be a great thing if somebody else pays the interest for you and you’re financing an asset that’s putting money into your pocket. That’s good debt but bad debt is when you’re paying interest on it, especially on a depreciating asset. Buying a car is a good example of a bad thing to do with money overall. You’re buying something that goes way down in value quickly while you’re paying interest on it. You’re paying for it again and again.

They asked Einstein:

“What’s the most powerful force in the universe?”

Einstein said, “Compound interest.”

Now, when you’re in debt like this, you’re not feeling the full force of compound interest if you’re making some payments. That’s the problem! You’ve got the most powerful force in the universe working against you 24/7. So one way or another when looking at these options to get out of debt or to deal with your debt, you want to find a way to stop paying this interest and start earning interest.

Why?

The basic formula for wealth, no matter who you ask, all boils down to this (if they’re telling the truth); simply spend less than you earn and invest the rest for compounding interest so your money grows. If you do this then eventually you’re going to become wealthy!

Your money will be working for you and you will no longer have to work for it. I imagine the goal for everybody is to one day retire, maybe one day sooner than later. If we ever want to do that we’ve got to get out of this bad debt. If you’re paying interest, to me that sounds like a financial hardship; if you have to work for money so you can pay interest.

I have a client in Oklahoma. A good old boy, a really nice man, in his elderly years and for seven years straight he has been on social security. He has been taking cash advances from his credit cards so that he can make his minimum payments.

Think about that one… He’s taking cash advances from his credit cards, where he has to pay 30% interest to make his minimum payments.

Those minimum payments are 80% interest or more. It’s just a ridiculous cycle! I don’t know if you have ever felt like this; being in debt and making these payments is somewhat like running on a treadmill with a backpack full of bricks. Somebody keeps dropping more bricks into the backpack and turning up the speed and the incline on the treadmill.

Unfortunately, unless you find a way to get out of the trap, that’s your destiny.

So let’s take a look at these options again…

Number one is paying off your debt. Whether through a refinance, a 401k or by pulling money out from under your mattress, if you can write a check somehow you can pay your balances off and stop paying interest.

Always think about the math. For instance, if you’re earning 10% interest from a 401k you have to pay taxes on the capital gain that you get, and it’s also not guaranteed, it’s uncertain. It goes up and down. Let’s say you’re earning 10% or even 20% on some kind of aggressive 401k, you still have to pay taxes on it. Maybe it’s a good rate of return, but think of the credit card debt that you have. Your interest rates are probably between 10% and 34%. The average in America is 18.9% (probably higher these days). Just look at your recent credit card statements and look at the minimum payment, then the finance charges for the month. You shouldn’t be surprised if 70% to 90% of your minimum payment is going towards interest (out of your pocket and into the pocket of the creditor), but you should be very disturbed about it. If your interest rates were 20%, you would be doing better than my average client.

Think about the 20% interest you’re paying on credit card debt. If you were to pay it off by taking money out of your 401k, where it’s earning 10%, to pay off an equal amount of debt you’re paying 20% on, that means a 20% after tax guaranteed rate of return. Paying taxes and still getting 20% on your money, and it’s guaranteed! I don’t know of any other investment out there available to the common public paying this kind of return.

Remember the Big Idea! (See Blog: “The Big Idea- How to Solve Your Financial Problems” if you haven’t!)

We’re going to look at a couple of ways to get some leverage and pay off the debt you have for even less money, an even better return on investment! You want to find a way to stop paying interest and start earning it, allowing yourself a chance at retiring in this lifetime!

10 BIGGEST REASONS TO BE DEBT FREE WITH BETTER CREDIT & CASH FLOW

The resolution I’m going to ask you to make today has the power to change your life in many profound and specific ways.

* People will respect you more.

* You’ll have more power to control your life, your career, and your future.

* You’ll be richer, happier, and more confident.

* You’ll have a much easier time getting people to do what you want them to do … on your timetable and on your terms.

I’m talking about becoming debt free with strong cash flow and credit, even to build wealth and become a cup overflowing.

Whether you’re ___ … or ___… or ___ … you’ll have much more success if you’re debt free with strong cash flow and credit.

YOU HAVE YOUR OWN REASONS

I’m sure you have your own reasons to get out and stay out of debt, manage your spending, save money, and have good credit right?

How do I know?

Because you are here right now.

So WHY do you want to become debt free with better credit & cash flow?

Take a minute right now to think about WHY you want to get out and stay out of the “bad debt” you’re in.

I know you “need to do something” about your debt.

I’m right here with you.

My success in life is directly proportional to how much I help others solve their financial problems.

Only if these words are valuable and useful to you will you recommend this to your friends and family. It might be the biggest gift you ever give them.

PLUS, SOME OTHER THINGS WILL HAPPEN.

Financially healthy people are automatically held in higher regard than those who struggle with debt and bad credit. You’re seen as someone who’s intelligent, successful, and dependable. Your thoughts and ideas carry more clout. People respect your opinions more and give more credence to what you say. They trust you more, because they can “feel” the sincerity and confidence that’s associated with being debt free with good credit and positive cash flow.

As Adam Smith said, “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”

I think you’re getting the idea here. Your financial health can be the difference between getting people to champion your ideas – and having your ideas set aside (or, worse, dismissed altogether).

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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