Debt Free Forever – The Credit Card Pay Off Plan

This is the third post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

Make sure you have read parts one and two of the series before reading this.  You also need to have done the previous assignments before you can start paying off your debt.

Now, in part 2 you filled out a worksheet that listed all your credit cards, the amount you owed, the minimum payments on your credit card, and the amount you are actually paying.   Hopefully you are paying more than your total minimum payments each month. If you are paying only your minimum payments, or if you are not even paying your minimum payment, we will need to get into some advanced strategies. I’ll save those for the next post.  But I have found that most people who want to pay off their credit cards,  pay more than their minimum payment each month, sometimes quite a bit more! But this can cause problems.

What I see happen is, some people are so determined to pay off their credit cards, that they put every extra dollar into credit card payments. Then, when something comes up, (and you know something always comes up!) they don’t have the cash and have to pay for the unexpected expense with their credit card.  The other thing that happens is people get tired of living frugally and not having any fun.  If every extra penny is going to paying off the credit cards, eventually you are going to rebel and go on a mad spending spree! It is important to be able to treat yourself every once in awhile. For most people it will take a few years to completely pay off the credit cards. You need to be able to treat yourself occasionally.

So, back to the worksheet.  Take a look at your total required minimum payment, and the amount you are actually paying each month, and find the difference between the two. Hopefully, the amount you are paying on your credit cards each month is at least $15 more than all minimum payments.  This amount will be your debt repayment amount each month. Even though your minimum payments will go down, the total amount you pay on your credit card debt will not change.

The One Third Plan

Here is where we get down to business. I like to call my plan the one third plan.  Take whatever amount you are paying over the minimum payments and divide by three.  One third will go into savings, one third will be an “extra” payment on your credit cards, and one third will be your fun money. You can spend it on anything you like, without any guilt.  You can save up your fun money and buy something big (my husband bought a motorcycle with fun money), or you can use it for little treats here and there. (I spent my fun money on lattes and magazines.)

Fun Money Is Important

Now if you are really anxious to pay off your credit cards you might think you should skip the fun money. DON”T DO IT! The fun money is very important. It will help you get over feeling guilty about spending money. If you stick to the plan you will be paying off your credit cards and growing a savings account, so it is OK to have a little fun! :)

You Need a Savings Account

The savings account is also very important. It doesn’t matter how small the amount is, you must put something into savings every month. This money is not to be touched, except for “those things that come up”.  These are things that you NEED, that othewise you would have to use your credit card. So, when you car needs repair, or your air conditioning gives out in the middle of summer you can use this money. Later we will talk about how to budget for all those things that come up.  But for right now you need to work on your savings account.

For your extra credit card payment you have to decide what type of person you are. Most credit card pay off plans will tell you to put your extra payment to the card with the highest interest rate. This will maximize your interest savings, and you will pay off your credit cards quicker this way…if you stick with the plan. However, I find most people are able to stick to the plan better if they acomplish smaller goals along the way. I usually suggest people put their extra payment to the credit card with the smallest balance. There is quite a bit of satisfaction in seeing a card with a zero balance!  With either method, once you pay off a credit card, the amount you were paying on that card gets added to the payment for the next card you are working to pay off.  (This is often called the snowball method of paying down credit cards.)

When You Get Extra Money

Now, from time to time you will get extra money.  Tax refunds, a raise at work, a gift from Grandma, any extra money you get needs to have the one third rule applied.  One third will go to savings, one third will be an extra payment on your credit card debt, and one third is fun money.Do this every time you get extra money and you will really accelerate your debt repayment and grow your savings account.

Assignment #3

This is the hardest assignment, but also the most important. From now on you must vow to pay cash for everything. If you don’t have the cash, you can’t buy it. You will be surprised what you can live without! In my next post we will talk about where to find extra money, for those people who are not paying more than the minimum payment.

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