Attacking My $30,000 of Debt – Money-Stupid Anonymous

{19 Comments}

I owe almost $30,000 in debt.

That number terrified me the first time I saw it. I don’t even make $30,000 per year; how can I possibly pay off that kind of debt? In my past, as a money-stupid Canadian, I would have shrugged my shoulders, grabbed a bottle of wine, and said “Meh, taking ten years to pay off debt is no big deal, lots of people live like that”. That, my friends, is the definition of money-stupid.

I like to think I’ve grown as a person since I held that particular attitude. My response this time around was to grab a bottle of (cheap) wine and a calculator. This time I said “It’s possible to pay off $30,000 in less than three years — lots of people have done it”.

The first step is admitting the problem. I needed to concisely know what I owe, to whom, and the cost of each. I came up with the following:

Debt Principal Interest Rate Minimum Payment
Student loan $24,000 5.5% $278
Future Shop Credit Card $520 29.99% $20
MasterCard $968 19.99% $32
Visa $2020 19.99% $50
Car loan $1845 13.99% $205

The minimum payments are $585 per month alone! And let’s not forget that, by making the the minimum payments, I’d be in debt for a full 10 years (and that’s assuming I don’t amass any more within that time). This is totally unacceptable. The credit cards ALONE would take five years to pay off at their current interest rates.

(Editor Joe’s Note: I did a quick calculation; Sara spends roughly $200 a month on interest. By eliminating all four of her non-student loan debts – which are less than 20% of her total debt, a very manageable $5,300 – Sara will cut her interest expenses by almost 45%. At that point, the remaining $110-ish a month in interest payments will, at least, be tax deductible because they’re payments on her student loan. Go Sara!)

If you want to find out how long it will take to pay off your debt, there are many great debt calculators out there on the web. I used this one.

I may be in debt, but debt is in MY crosshairs!

I may be in debt, but debt is in MY crosshairs!

Last week’s post received many comments with awesome advice. In that advice, I think there were a few key principles related to debt:

  • Recognize the problem, commit to its resolution, and stop going into debt
  • Reduce interest rates as much as possible
  • Pay the highest interest debt first
  • Destroy debt as fast as possible

I’ve created a plan of attack based on this sensible advice.

Obviously the debts with the highest interest rates that I listed above are the most critical. Unless there’s a guy out there with a baseball bat coming for your kneecaps, your priority should always be to blow as little money as possible on interest. So goal number one is to lower the rates on my MasterCard, Visa, and most especially my Future Shop card. I’ve got some homework (I actually started on the weekend but we’ll save the results for next week). Keep in mind, if I’m successful, it will change this post’s math (in a good way).

I need to pick a number for debt repayment in my budget. Obviously, it needs to be higher than the total of my minimum payments, $585. Based on my current income (and I’ve started trying to increase this figure), I’m choosing $875.

I put all of my debts in order from highest interest to lowest. In my case this list is:

  1. Future Shop
  2. Visa
  3. MasterCard
  4. Car loan
  5. Student debt

I’ll make the minimum payments for debts # 2 to 5 (equaling $565), and put the balance of my debt repayment amount ($875 – $565 = $310) on the Future Shop card. Once this card is paid off, I’ll take that $310 and add it to the $50 I’m currently paying to Visa, and make $360 the new monthly payment for that bill. This process will repeat until I am down to paying $875 a month on just my one, final, debt.

This plan is fluid. My topic for next week will be lowering credit card interest rates, and how that will affect my long term goals. When the rates change, the payment priority may as well.

I hope everyone likes my plan to attack my nearly $30,000 in debt. As always, I appreciate feedback, so if anyone has any tips or tricks they want to share, please do!

(Editor Joe’s Note: my advice is to get your three credit cards consolidated as soon as possible onto a “teaser rate” credit card deal. Since you don’t have a ton of principal on those cards, the 1% or 2% interest rate after fees will make repayment of these debts much easier. Also, I’d look into the repayment terms on your car loan. Can you prepay, or are you locked in? If you can prepay without incurring disastrous fees, I’d also try to consolidate this $2000 debt, at 14%, into a cheaper teaser rate. Finally, I’m not sure which of the three credit cards is your oldest – Visa, MasterCard, or Future Shop – but keep the oldest card after you’ve paid it off, assuming it won’t tempt you to go back into debt. The average age of accounts is part of your credit score. Older is better. Normally credit scores are irrelevant, but over the next couple years you will need to access cheaper forms of credit to help in your debt journey so optimizing your score is potentially valuable.)

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19 Comments… Share your views

  1. Solid plan Sara!

    Question, Joe: I am about to cancel my second oldest CC, and the one on which I spent the bulk in the past 5 years. I need to cancel it because of the annual fee (I know, I finally smartened up). I am not too worried about the impact because I have replaced the credit room on another CC, and my credit score is solid. But you got me thinking about it again. Is there a downside to my plan? I have a longer history on a different card, which I am keeping, but it’s not as extensive, shall we say. Thoughts?

    • My understanding is that the age of every account is added up and divided by the total number of accounts; but credit scores are proprietary, and so are the numbers that feed into that score. Since you pay your bills on time, your score is probably very good whether you keep or cancel a 5-year old card that is in good standing. Not that it really matters unless you want to buy a new house in the next few years.

    • Instead of cancelling, check to make sure they can’t convert your card into a no-fee card. A lot of credit card issuers have different cards, they can just move the account. Then you keep the credit history and lose the fee. Good luck Adina.

      • Great point, didn’t even think of that, even though that’s what my credit card issuer for my oldest card did. I had a no-fee student card, and they moved it to a no-fee non-student card and assured me the account was the same, just the card changed. But if you have a huge credit limit and don’t plan on using it, make sure to insist they REDUCE that limit — having a ton of unused room can adversely impact your credit score, too.

        • “having a ton of unused room can adversely impact your credit score, too.”
          Can it? i don’t doubt you I’m just suprised. I thought they look at total credit in use divided by total credit available, and want that % less than 35% to get the best score..? That’s how I always look at it. Credit scores are such an enigma.

          • lol yes, we’re obviously speaking in terms of general observations because almost nobody knows the actual formulas involved. Having too much debt relative to balances indicates a person is “maxing out” their credit options and can hurt your score. But having too much extra room sitting around, even if it’s not used (I’m not sure if this is relative to your income or not) can definitely hurt your score; I’ve heard it’s the “crazy” factor, a.k.a. if you went crazy and used all of your credit, would the hole be too deep to recover from?

      • Ok, this will sound crazy… but I am uncomfortable with multiple credit cards. No idea why, because I only tend to use one anyway, and I actually have remind myself to do so as opposed to just swiping my debit card (unlimited free transactions, no fee – natch). So it’s not the fear of temptation, more just a phobia of credit cards. Having 3 just sounds… redundant. But you bring up a good point, and if they make me a decent pitch, I might just take that option.

        • I have 3 now but I got by with 2 for the longest time. I honestly only use 1 in Canada and 1 in the USA. 3 is overkill. I am shocked when I hear of people with only 1 credit card though; many times I’ve been dating someone in long term relationships that have only 1 credit card, and then they find out that their card has been “put on hold” because of a security scare determined by their computers without notifying the cardholder until they next try to use it. (Cut to me paying for an expensive dinner on my own birthday) With the amount I travel, only one credit card would be nuts.

  2. Your approach and Joe’s advice are spot-on. Speaking from experience, when we do not tackle debt in an organized manner, it’s almost impossible to get rid of it. Without the right approach we just don’t take it seriously enough. Treat debt like a toothache; there is no real relief until it’s all gone.

    And there’s the much larger benefit (assuming we stay focused) of using that same organized approach to build wealth once the debt is gone or under control. Financial freedom is a goal that is worth all of the sacrifice and hard work we put into achieving it. Best of luck with the plan, Sara!

    • I didn’t even realize how much I was paying in debt until I sat down and tallied it all up. Almost $600 per month without even thinking about it! You are definitely right, Milton, creating an organized plan is absolutely the only way to really combat debt. The way I was going, I would have been paying minimum payments and chucking an extra $100 here and there for the next 10 years. With a solid plan under my belt I will have it all paid off in half of that!

  3. Something not to forget though aobut your original reaction is that some of that feeling is right. What I mean is this — go ahead and make your plan to pay off that debt sooner, get your monthly payments all scheduled out (and if you get some sorta windfall, put that towards your debt), but at the same time, don’t worry too much. After you do your calculator business, then DO shrug, open your wine, and enjoy your life!

    • Oh, no worries on the stress front, TB! As Joe can attest, I am perhaps one of the world’s MOST laidback people. I find that creating a solid plan actually makes debt way less stressful. I think what most people don’t realize is that uncertainty is what feeds a lot of financial woes. Sitting down and looking at what you owe may be a scary thought, but when you do it you know that you won’t be broke like this forever, and that is nothing but a relief.

  4. It’s a solid plan, the only thing missing–and I’m sure this is on purpose to give your guest posts some structure–is that you should be looking for ways to temporarily increase your income. The whole “gazelle” intensity thing from whatsisface, Dave Ramsey, is genuine in my opinion. Sell things, pick up a part time job, work more hours if you are paid hourly, let friends and family know you’ll come do odd jobs for $50 an afternoon or something. I assume you’re already cutting your expenses down to the bone to hit this hard, and you did say it’s a fluid plan.

    When I had debt in my 20s, I paid more than the minimum once I got serious about paying it off—but the big thrill was taking a bonus or tax refund and wiping out a huge 4 figure chunk at once. I’m too impatient to do things slowly and surely.

    • Very good point, Adam; increasing income is very important if you want to quickly pay down debt. I have actually taken some steps towards this, and, as you’ve already guessed, I’m saving that one for a later post. I think increasing income deserves a post to itself, because there are so many great ways to do it, so definitely keep an eye out for that in the coming weeks.

  5. Is there no way to sit down at your bank that you deal with and have all (or most of) the loans consolidated (and paid off) into one lower fee loan? If you are in good standing with one banking institution they should do this for you at a vastly reduced rate. One HELOC or LOC for 30K at 6 or 7 % or less. What am I missing here? To me that would be the first choice.

    • With the student loans, her rate is 5.5% and it’s deductible from her gross income (ergo 5.5% x effective marginal rate = tax savings). So it wouldn’t really make sense to consolidate at the moment, as the rate (let’s imagine 4% after tax) would be lower than a bank loan.

      For the rest, which is only approx $5300: (1) I highly doubt she’d get an unsecured LOC. Banks are just stupid risk-averse nowadays. Most don’t want to lend to people with poor credit for anything that isn’t secured by the CMHC or an asset e.g. a car. And (2) the rate would be much higher than a credit card balance transfer. Sure, if she doesn’t pay this consolidation off within a year, the rate will skyrocket if she didn’t re-finance on another teaser rate. But if she doesn’t pay off the $5300 in one year then she will probably get a massive, collective lecture from the folks here lol.

      After that’s paid off, she may consider “biting off chunks” of her student debt to put on super low-rate teasers as they become available (only a chunk that she knows she can pay off in, say, a year).

      I’m sure Sara will respond sooner or later, but she has had internet connectivity troubles at home and has been communicating with me via text message, but until then thanks for your ideas on Sara’s behalf.

    • Thanks for the suggestion, Paul. I am actually lowering my rates by transferring my balances to a promo rate credit card, which I will write more about next week. Your suggestions are good, however. There are definitely several options out there for reducing interest. I found one that works well for me, but a line of credit would definitely work as well.

  6. I just wanted to drop a line to everyone to say thank you so much for the comments, and to apologize for being so slow to respond. As Joe pointed out in response to one post, I have had internet connectivity issues, and I have also been in training for a new job and saying goodbye to a friend who is moving out of town. It has been a crazy day! I do appreciate everyone’s feedback, however, and will do my best to keep on top of responding as quickly as possible.

  7. Nothing at all to add – there’s plenty of good advice and suggestions already – other than congrats to you, Sara, for taking this on, and being open, honest and sharing with others. It may seem to some folks like just adding up numbers and doing some simple math (which I suppose it is from a technical standpoint), but that would be to ignore the greater personal learning, committment to lifestyle change, and courage to share it all. So well done, and keep on it – in 30 years, I think you’ll be glad you did.

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