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.
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.
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!
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