I am a proponent of a set it and forget model to reduce debt, with just a few minor tweaks here and there.
I want to say up front that I am NOT a financial planner and hold no credentials or license to advise individuals on how to handle their money. This post is how I have tackled my debt, and hopefully, you can find some benefit from my process.
I stopped using my credits cards, really, all of them, I mean it. If I kept saying “ just one more charge' then I would have no chance of ever paying off my debt, I would just be spinning my wheels unless I STOPPED incurring additional credit card debt.
The only exception to my rule is traveling for work. I charge hotel and airfare to my American Express, then get reimbursed for my expenses which I then use to pay off the credit card. Running a balance on my AMEX is not an option, so this keeps my spending in check.
I reviewed every last credit card and logged the balance owed, interest rates, due dates, statement end dates and minimum payments. I applied for three zero interest credit card and took advantage of the zero interest balance transfer offers and this was the only time I permitted myself to apply for new credit.
I reviewed my credit reports to ensure everything was correct, then put a FREEZE on credit reports from the three major credit bureaus. This step was essential to keep me from any impulse credit card shopping, those sign-up bonuses can be incredibly tempting, but if I have an extra hoop to jump through the impulse just might pass. An additional bonus is that there is a level of protection against a criminal opening up credit in my name.
I setup three bank accounts for because I wanted to separate credit card debt from all other types of debts. One account is used for credit card and loan debt. My consumer debt will eventually go away and the second account is for housing expenses, mortgage, HOA, utilities, insurance, etc. The third checking account is for general day to day expenses. This model has worked well for me, everything I have “leftover” after groceries, gas, etc. I can choose to have a little fun or put the extra cash toward my debt.
I do not have a debit card for the two accounts I use for debt payments; it’s just too easy to “borrow” a little from the bill payment account and risk running short.
I totaled up all my monthly bills and have enough deposited from each paycheck to cover those debt payments. Once the money is deposited into the checking account, those funds are only used for debt repayment.
I ran a debt repayment calculator to see how much I would need to pay off my debt in three years and made a few adjustment based on how much money I have available each month and this determined my minimum payment.
My debt repayment model has worked well for me, everything I have “leftover” in my third checking account after groceries, gas, etc. I can choose to have a little fun or put the extra cash toward my debt.
Step Six (optional)
You can set up automatic payments if you are comfortable with it. However, I prefer to have control over how much money leaves my account. Maybe it’s a bit old school of me, but I don’t want a creditor having direct access to my checking account.
My goal was to have my debts in a few accounts as possible thereby having fewer account s to check each month. This probably goes against most financial advise however I’m not going to worry about my FICO score at this points because after a year or so it will improve on its own and I’m not planning on applying for additional credit.
When I completed my balance transfer, I aimed for not using more than 70% of the available credit. Everyone is different, but I have not experienced any adverse actions from creditors by using a somewhat high 70% of available credit, this might be because by combined debt to credit ratio is still under 30%.
I am diligent in checking my accounts each month and pay attention to promotional balance transfer end dates. I have a Capital One Visa with a zero balance, and I use their free CreditWise service to check my accounts every week.