How To Crush Debt | Credit Card Debt | Pay Down Debt

Crushing Debt With As Little As An Extra $20 Per Month

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How’s it going, everyone? Let's talk about a topic near and dear to my heart; crushing debt. Debt is sometimes a necessary evil in everyday American life, however, too much debt can be soul-crushing. There are two main ways for crushing debt, and by using these methods, you'll be on your way to living debt-free.

Debt In America

In 2017, the median household income was $61,372. But the typical American household debt was $137,063 (source: debt.org). This debt includes mortgages, student loans, credit cards, auto loans, personal loans, and so forth. 

While some debt is considered okay, such as a mortgage, other debt, such as credit card debt, can be extremely detrimental. High interest rates can cause people to take years to pay off a single credit card. Let’s talk about credit cards.

Credit Card Debt

In October of 2019, the total credit card debt in America was $1.088 trillion. Divide that by 128 million US households, and you get that the average credit card debt per household is $8,500.

The average credit card APR is 21.28%, as of March 2020. If a person was paying only the minimum payments of their $8,500 balance at 21.28% APR, it would take them over 15 and a half years to pay off the card, and they would be paying $7,328 in interest.

That means they’re paying an additional 86% more money on their original balance! This leaves many consumers in an endless cycle of debt and is why it's critical to not carry a balance.

What's even worse is if you miss a payment, you could be charged penalty APR as high as 29.99% that could rack up even more interest.

Related Post: Credit Card Facts That You May Not Know

Debt From Loans

Another type of debt is loans. Loans have a fixed monthly payment and follow an amortization schedule. In the earlier payoff months, more of the monthly payment goes towards interest and less goes towards the principal.

As the payments continue, the amount that goes towards principal increases, and the amount towards interest decreases.

Personal loans can be used as an avenue to consolidate high interest debt. Many people use personal loans on platforms such as Lending Club to consolidate their credit cards into a lower interest loan.

Related Post: Review of Lending Club: A P2P Lending Platform

This can not only save hundreds if not thousands on interest but also standardize the monthly payment over a term. Doing so will cause you to spend less on interest in your journey to becoming debt-free.

Related Post: 9 Ways Hot To Get Out And Stay Out Of Debt

Mortgage Debt

A mortgage is a common type of debt that often has a very low interest rate compared to other debts. While one should try to pay down debt as efficiently as possible, paying down one’s mortgage quicker versus investing is a hot topic in the personal finance realm.

Related Post: Should You Pay Down Your Mortgage Or Invest First? Here's The Math

The idea is that if you pay down your mortgage first, you will have less money to invest upfront, meaning you’ll have less money in the future.

The argument to this is, if you pay down your mortgage first, you’ll have fewer living expenses going forward, meaning you’ll be more financially independent.

There is no right answer for mortgages. You can invest now and pay off your mortgage over time, or you can pay down your mortgage first and invest later.

Where To Get More Money To Get Your Debt In Order

When it comes to crushing debt, you’re going to need extra cash. If you’re living paycheck to paycheck, you’ll want to first lower your monthly living expenses so that you have more money available to crush debt with.

You want to come up with as much as possible, but even $20 goes a long way. I’ll give an example of that below.

$20 A Month Towards Minimum Payments

Let’s use a scenario where you might have a credit card with a $5,000 balance and 21% APR. If you were to pay only the minimum payment each month, it could take you 13.5 years to pay off the balance, and you would pay an additional $4,168 in interest.

That’s 83.35% more money that you’re paying on the original balance.

Now, if you were to pay an extra $20 per month to every minimum payment, it would now only take you 7 years and 1 month to pay off your balance.

You would only now pay $2,814 in interest, which is 56% more money on the original balance. You saved $1,354 in interest payments as well as knocking 6 years 5 months off the duration of payments. Long story short? $20 goes a long way.

  • Original balance: $5,000 with 21% APR
  • It would take 13.5 years to pay off with only minimum payments
  • You would pay $4,168 in interest.
  • Paying $20 more per month reduces payments to 7 years 1 month.
  • You would only pay $2,814 in interest.
  • You save $1,354 and 6 years 5 months of repayment!

So, while $20 might not seem like a lot, it will definitely get you to debt-free status faster than if you were to pay only the minimum payments.

Two Methods For Becoming Debt-Free

There are two methods for paying down debt. These two methods are called the avalanche method and the snowball method. Let’s go over what each of them means and which one is right for you.

The Debt Avalanche Method

In the avalanche method, the trick is to pay down your highest interest rate debt first. This method ends up saving you the most amount of money, but it may take a long time to pay off a single debt source. Here’s an example:

Assume you have the following sources of debt:

  • Credit Card A, 21% APR, Balance of $3,000
  • Credit Card B, 18% APR, Balance of $1,000
  • Credit Card C, 24% APR, Balance of $4,000
  • Student Loan Debt, 5% APR, Balance of $12,000

With this methodology, you would first pay the minimum payments towards each of your debts. Then you would apply extra money towards Credit Card C.

After Credit Card C was paid off sometime later, you would then pay off Credit Card A. Credit Card B and the Student Loan would follow. The reason for this order is because you are focusing on the highest APRs first. This saves you the most amount of money.

The drawback of this method is that you may feel like you’re taking a long time to pay off any of your balances. That’s because, in this example, Credit Card C is your second highest balance. This is how the debt snowball method differs, in which I’ll go over now.

The Debt Snowball Method

The snowball method focuses on paying down the smallest balance first. Similar to the avalanche method, you would first pay the minimum payments on all your debt sources.

Now though, what you would do is you would use your extra money to pay down the smallest balance. Let’s rehash the same example above…

  • Credit Card A, 21% APR, Balance of $3,000
  • Credit Card B, 18% APR, Balance of $1,000
  • Credit Card C, 24% APR, Balance of $4,000
  • Student Loan, 5% APR, Balance of $12,000

With the snowball method, you would pay off Credit Card B first. After Credit Card B was paid off, you would then focus on Credit Card A. After that, you would crush Credit Card C’s balance, followed by the Student Loan. 

The reason for using this method is psychology mostly. While you won’t be saving as much as you do on the avalanche method, you may feel better as each balance goes to zero, hence why go from paying the smallest balance first and then work your way to largest balance.

That way, you’re essentially deleting debt sources little by little.

Which Method Is Best

Both methods have their pros and cons. The main pro of the avalanche method is that you will pay less interest overall. The main pro of the snowball method is the psychological effect of quicker wins and feeling good that debt sources are being eliminated faster.

I personally prefer the avalanche method, but you may prefer the snowball method. Either way that you choose, you'll feel the best when you're debt-free completely.

When To Consider Debt Consolidation

You may want to consider debt consolidation in order to get your bills paid down once and for all. Before you consider debt consolidation, it's important that you only do this once you're ready to tackle your situation and not take on any more debt.

By doing a consolidation, you'll take all of your debt into one monthly payment that may be at a lower interest rate but for a longer term.

Debt consolidating may save you a lot of money on interest payments and it may help you in the long run, but it may lower your credit score in the short term. It's important that you don't get into more debt after you consolidate or you'll be in a worse situation than you were before.

How To Prevent Getting Into Debt Again

The best way to avoid getting into debt again is to have an emergency fund. An emergency fund should consist of roughly 6 months of living expenses. Having an emergency fund will cushion you should you have a financial hardship. 

Another way to stay out of debt is to re-evaluate your spending habits. It's easy to get into the habit of overspending with a credit card, because credit cards feel like free money.

If you don't trust yourself with a credit card, consider clipping yours. I don't recommend closing the account because that may adversely affect your credit score. Instead, lock your cards up or destroy them.

Once you feel you can keep your credit card balances under control, you may want to revisit using them.

Wrapping It Up

We talked about crushing debt and the two methods of doing it. The way you choose is up to you. The important thing is that you get out of debt as best as you can – especially credit card debt.

If you're looking to crush your debt and the ability to put extra money in your pocket each month to save for your future, or for a dream vacation, car, or home, then you need The Dollar Blogger's Money Mastery System where I will teach you how.

Don’t be ruled by your debt. Crush it out of your life.

You can get out of debt fast with an extra $20 per month applied to your credit card's minimum monthly payment. In this post, I detail how, as well as outline the debt snowball method and debt avalanche method.
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Bo, the Dollar Blogger

Hey there, Bo here! Are you curious about personal finance? Are you looking for ways to crush debt, make more money, and increase your savings?

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