Murdering Your Consumer Debt

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The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
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consumer debt
Photo Credit: Sean MacEntee @ Flickr

Because you, our Readers and Fellow Revolutionaries, told us that one of the biggest things holding you back is debt, today we will talk about debt. Specifically, consumer debt and how to murder it with the force of a thousand suns. Future articles will focus on student debt and mortgages.

Consumer debt is basically credit card debt and personal line-of-credit debt, and any financing that was taken out to purchase a depreciating asset (such as a car or a boob job). Consumer debt is the most dangerous types of debt out there because of three things:

  • They’re ridiculously easy to get into (just walk through any college campus and count how many times someone shoves a credit card application in your face).
  • They are NEVER used to purchase anything that goes up in value.
  • Their interest rates are through the roof (>10%) and they are generally non-tax-deductible.

Even Wall Street assholes, who make a living out of giving bad financial advice, consider consumer debt “bad debt.” As we’ve written before, a “safe” amount of consumer debt to carry is zero.

So obviously, the best policy towards consumer debt is to never get into it in the first place, but if you’re already in that situation there’s no sense in whining about past mistakes. The only thing that matters is what you do from here on in to fix it, so with that in mind, here are your 5 steps to murdering the fuck out of your consumer debt.

Rule #1: Do NOT take on any more debt

This is really important. If you have ANY consumer debt whatsoever, you are in financial trouble. You are in a boat in the middle of the ocean, you’ve sprung a leak and you are slowly sinking. So as the first and critical step in saving your butt, do NOT for the love of God make it worse.

Stop using your credit card completely. Any further spending should be done using cash or debit cards. This is because normally when you buy something on your credit card, you aren’t charged interest until the balance is due on your monthly statement. This is called a grace period. However, once you start carrying a balance on your credit card many companies cancel your grace period. That means that purchases start accruing interest immediately, making your situation worse and worse.

And this goes without saying, but DEFINITELY don’t buy a house.

Rule #2: Do NOT miss any payments

Whatever you do, do NOT miss any payments. Pay off the minimum payment each month on all your cards if you have to, but don’t miss any. Once you do, you are considered in default, and many options for getting out of debt (like refinancing) are now closed off to you.

Rule #3: Increase Your Debt-Killing Ammo

When it comes time to killing, well ANYTHING, you need ammo. And when it comes to killing your debt, your ammo is your money.

To figure out how much ammo you have, take your take-home after-tax pay (combined if you’re married). Now minus off your basic living expenses (rent, food, gas, etc.). Don’t include debt payments here, just your basic living expenses.

So for example, if you make $3000 a month and you spend $2000 on basic necessities, you have Debt-Killing Ammo of $1000. This is how many bullets you can shoot at your debt each and every month.

So to increase your Debt-Killing Ammo, you have two options: Increase your Income or Reduce Your Expenses.

What this means is you have to be willing to:

  • Take on extra shifts at work. If you can get overtime by working during the holidays, do it!
  • Take on an extra job. Here’s a story of a guy who worked three jobs to pay off his mortgage in his 30’s. If he can do it so can you.
  • Take part in the Sharing Economy. If you have an extra room, rent it out on AirBnb. If you have time on the weekends, drive for Uber. It’s only temporary, and you may find yourself actually enjoying it like Financial Samurai did.
  • Cancel any vacations, cook more instead of eating out, and cancel any suspend and recurring bills like gym memberships or Digital TV that aren’t absolutely necessary.

Rule #4: Refinance Your Debt

Refinancing your debt is simply the process of replacing one loan with another loan. Refinancing can be a little complicated especially when it comes to other types of debt with more complex terms (like Student Loans or Mortgages) but for consumer debt, the only thing you should care about is the interest rate. Lower is better.

So what refinancing your consumer debt means is looking for ways to reduce the interest rate to as low as you possibly can.
Now, as a general rule treat every refinancing deal extremely carefully. Refinancing can be used to greatly reduce the amount of interest you’d have to pay, but the companies doing this aren’t doing it out of the goodness of their heart. They’re hoping that once you refinance with them, you’ll relax a bit, fall back into your previous spending habits, and rack up even more debt. If you refinance, you have to play the game perfectly or you’ll wind up even worse off.

That being said, if you play the game perfectly you’ll save a butt-load of money and get out of debt a lot faster than before.

One option is using a personal line of credit. These are generally available to everyone and are usually pegged to your bank or credit union’s prime interest rate. The interest rate will still be high (5-7%) but that’s nowhere near the 20%+ rates credit cards are charging. Once you have this account open simply write yourself a check from your LoC, deposit it into your checking account and then pay off the credit card balance. Voila, you have just sliced your interest rate by two thirds.

Another option is using 0% balance transfer cards. These are credit cards that have a temporary teaser interest rate of 0%, typically for 12 to 18 months for balance transfers. Basically you sign up, and once you’re approved you fill out whatever forms they have to move over your previous credit card balances to them. And if you keep signing up for new ones and transferring your balance every time the introductory period runs out, you could potentially pay NO interest while you’re paying off your debt!

However, if you forget and keep your balance on the card after the teaser period, BAM you will be hit with 20% interest rates once again. And if you make any purchases on that card while you still have a balance, you’ll start accruing interest immediately. Remember Rule #1? This is how they get you.

Here’s Forbes’ list of the 5 best balance transfer cards available

And finally, your credit card company may have refinancing options available if you call them and ask. Typically called “Hardship Programs,” these are repayment plans where they lower their interest rate voluntarily rather than risk you defaulting. Check with your credit card company and explain your situation.

Also, this only works if your credit rating is still good. So if you default on your debt, this probably won’t work (See Rule #2).

Rule #5: Declare Bankruptcy as a Last Resort

Bankruptcy should be your last resort since it screws up your credit rating for 7 years. But if you have SO much consumer debt that you even with doing everything you can to Increase your Debt-Killing Ammo and Refinancing, your time to pay off your loan is greater than 7 years anyway, you may as well consider it.

Plug your debt’s interest rate and the amount you can pay each month into the following calculator and see if this might make sense for you.

If the number of years is above 7, consult a bankruptcy lawyer in your area to see if you can get your debt discharged.

That’s it!

So that’s it for Consumer Debt. Coming up, we will be talking about strategies for getting out of Student Loans and Mortgages.

And as always, we love to hear from you! Are you currently struggling with consumer debt? Did you used to have debt and successfully got out of it? Tell us your story!

Click here for part 2: Murdering Your Student Debt

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21 thoughts on “Murdering Your Consumer Debt”

  1. Uggg, I heard all about excessive credit card debt yesterday as I shared a ride downtown in a late model electric car (we were both heading to City Council to fight against a proposed overly restrictive airbnb regulations – victory so far, thereby proving you CAN fight City Hall and WIN!).

    My buddy owns 2 electric cars (one’s a BMW, the other not much cheaper). He’s spending MAD BANK on these suckers, plus installation of 240 volt charging station and solar PV panels. He’s single-handedly saving the earth and the shareholders of Visa, Mastercard, Chase bank, etc with his profligate green spending.

    On the bright side, he’s doubled the rental gross from his downstairs basement apartment. “Take part in the Sharing Economy. If you have an extra room, rent it out on AirBnb.” – Indeed. He’s making enough from that 700 square foot space to pay for the mortgage on his house, taxes, and some utilities. He even said the extra $$ is going toward paying down his credit card debt. Which made me smile. And he knew about Mr Money Mustache and his new electric car toy, so at least he’s down with prudent money management on some abstract level.

    1. Yeah, I know people like that too. “I’m so smart. I brewed coffee at home instead of Starbucks. Also, I had to renovate my kitchen to match my new cappuccino machine. I’m so good with money!”

      I appreciate their good intentions, but they tinker with little things and screw up the big ones and wonder why they never get ahead.

  2. Rule #6 should be Remove all temptation! If you can’t control your spending then for God’s sake don’t go to the mall. If you are addicted to shoes, then DON’T go into any shoe stores until your debt is paid off. Don’t go into any clothing stores, furniture stores etc. And for the love of Pete, don’t go shopping online.

    When I was first married money was tight, we had consumer debt and were having trouble paying it off. We delayed buying ANYTHING until we had the balance at zero. So that meant that our living room couch was the back seat out of a Chevelle (I kid you not!) and our coffee tables were those plastic milk crates that you found behind the Macs Milk store. We lived like that for about a year. And yes…we still had friends…your true friends do NOT care if they have to sit on a car seat to visit with you. They only care about you. Remove all temptation to spend until you have your debt under control.

    1. Ha I lived like that for a bit when I arrived in Canada. Young, with little money (no debt thankfully) and no job, I shared a cheap place in Burnaby with a guy in the same boat as me, and we filled the apartment with whatever free crap we could find on Craigslist. I slept in a sleeping bag on the floor for the first 10 months or so and the “living room” had a pretty rotten sofa we were given, and the smallest TV going. The kitchen utensils were all from a dollar store and basically fell apart after a couple of uses. We had to muster up enough money for internet though (mostly to job hunt).

      Thankfully I got a job within a few months and eventually built up being able to afford a bed and move into an actual apartment with actual furniture, but it probably took around a year to actually have some disposable money to spend for myself.

      1. See, now that’s the kind of hustle it takes to make it in this world. Good for you 2! You’re going to kick ass at life, I predict (if you aren’t already) 🙂

  3. Totally agree with taking part in the sharing economy. I’ve been doing that for a while now with a lot of success. We had a guest room sitting empty, so we put that up on Airbnb and have been bringing in a good amount per month. It’s better than getting a roommate because your Airbnb guests are in town for specific reasons and don’t hang around the house, and are there for only a short time.

    We also have a dog, so we started dog sitting user Rover and DogVacay. It’s no more extra work for us since we already have to take care of our own dog. The difference between taking care of 1 dog vs. taking care of 2 dogs is pretty minimal. And our dog gets a friend to play with every once in a while.

    Finally, I wanted to get exercise, so I signed up to make bike deliveries using Postmates (think of it like an Uber for food deliveries). It’s not a ton of money, but I get the added benefit of being able to bike around town, get some exercise, and make some cash.

    The great thing about the sharing economy is that you can use it to make money off the things you already own or things you’re already doing.

  4. Well, I disagree. I see boob jobs as an good investment hedge against depreciating assets and sagging returns. They often cause mature stocks to rise during times of unsettling (and embarrassing) deflation.

  5. Great list guys.

    In my mind, one of the biggest issues with ‘killing’ consumer debt is the people. They might be able to pay down the debt, but eventually a new gadget, a fancy dinner, handbag, or even a vacation is ‘needed’ and then they bounce right back into debt to pay for it.

    Spending on pleasurable things can be addictive. Until that cycle of addiction is broken, the spending just continues.

  6. I wanted to mention there are other options to bankruptcy. Go to an non-profit like, Credit counselling of BC. That way you get unbiased advice of what your best options are. There are prepayments programs that non-profits that negotiate on your behalf to your creditors. Your credit is affected a little, for about 2 to 3 years, at least it’s better than 7.
    Don’t go to those debt for-profit companies for obvious reasons.

    1. Great note. I have very little experience with those so I didn’t include it, but thanks for letting our readers know such things exist.

  7. I feel quite lucky to have never had any consumer debt. I didn’t own a credit card until I moved to Canada (from the UK), simply because there is no need for a credit card in the UK. Here credit cards are gospel and you need it to build up a credit rating, so I got one (plus the cashback is just free money so why not). I was always taught to avoid debt at all costs from my parents, of which I am thankful for now as I’m pretty much terrified of all forms of debt.

    That being said I do have a sizable student loan, but being from the UK the interest is only the rate of inflation (so it’s better to not pay it off and invest than to pay it off) and they only demand repayments based on your income. I find the repayments to be comically low ($120 a month on $35,000 in student debt) even when I earn fairly decent money. Let’s just say it won’t be paid off for over 40 years if they don’t step it up, which they can’t unless I start earning a lot more. I don’t know a lot about student debt here but I believe it’s pretty suffocating.

    1. Good on you for avoiding consumer debt. That thing is TOXIC.

      And I’m glad to hear that the UK seems to have a reasonable public policy towards student debt. I’m currently writing the student debt post in this series, and as we’ll all see, it can be absolutely MONSTROUS this side of the pond.

      1. Yeah I’ve read a lot about how bad it can be here, I’ll be interested to see your post and just how bad it is as I’m fairly oblivious. My (Canadian) wife, who went though university here, was fortunate to have it covered by her parents too.

        I honestly have no idea how the UK student loans company is surviving. The system in the UK is at breaking point as people simply are not required to pay their loan back. It is predicted that 45% of money owed to the Student Loans Company will not be repaid ( because the income you have to earn in order to be required to repay it is simply too high. You only start repaying once you are earning £21,000 (about $35,000 CAD) and even then the repayments are laughably low. The loan eventually gets written off after 30 years if it isn’t repaid.

        Most of my University friends say the same thing, that they will never repay the loan because they do not earn enough money to pay it off within a reasonable time frame. The interest added to the loan (whilst low) is nearly as much as repayments made to it for many people, so the loan barely comes down. As I said in my prior post, it will be over 40 years (43 at my last calculation) before my loan is repaid, so a big chunk of it will be written off before it’s paid. My loan is also one of the smaller ones as I was fortunate to go to University when fees were only £3,000 a year as opposed to £9,000 now.

        Whilst this is great for me and most students, I can’t help but feel the whole system needs overthrowing and going to something more similar to the North American system. You can’t have the government funding University for students with 45% of them failing to ever repay their loan.

        1. I wouldn’t be too envious of the North American system. It downloads the responsibility of dealing with those bad loans from the state to the individual, who is far less capable of shouldering it. The state can always raise taxes to pay for it, the individual can’t.

      2. Really looking forward to your student loan post. I have a tiny student loan but with almost no job security I don’t know when or how to pay it off…I don’t need to start paying until March but that is also when my job is supposed to end…

  8. Cannot agree more with the thought that consumer debt is shooting yourself in the financial head. One of my direct reports, that I pay a nice six figure salary to, is in debt up to his ears. When I once told him if you can’t pay a credit card off at the end of the month, simply stop using it, he gave a disparaging chuckle and said, “You think it’s just that easy?” I asked him how this was complicated? When standing in a hole the best thing to do is stop digging.

  9. FIREcracker,

    When you are collecting all of this ammo, are you also holding retirement contributions to pay down the debt?

    We have about 32,000 in debt at roughly 6% interest.

    Should we stop retirement contributions beyond company match to kill the debt quicker? Or would it be okay to max out 401k’s at 36,000 and use the remaining ammo (12-18k/yr) to kill the debt more slowly?

    1. At a 6% interest rate it’s kind of a wash. If you can max out the 401ks and still have 12-18k left over to pay down the debt, I’d do that since your 401k room gets lost every year if you don’t use it.

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