Debt Reduction

When attempting to pay down debt, it's important to make payments that are higher than the minimum. Generally, a debt will not be reduced unless you pay at least the minimum payment + interest assessed for that period. That formula ensures that a) the debt will be reduced by the amount of the minimum payment and b) the overall interest will be reduced. They say people pay on credit card balances for 20 years, ultimately paying a lot more for whatever they did to rack up the bill.

A good rule of thumb is to take the above amount and round it up to an even dollar amount. Continue paying that amount every month, and every month you will be paying a slightly higher amount on principal than the month before. It helps to look at your bill every month and compare it to the bill for the previous month. If you're ambitious you can make a spreadsheet; over time you'll see the increase in principal paid each month. It's important to target only one debt for this type of activity, and yes, I know it's difficult. I did this in turn with each portion of my consumer debt, starting with the debt that was largest and had the highest interest rate, my credit card.

Once the first debt is taken care of, add that monthly payment to the next targeted debt so you will progress even faster. In my case, I had overwhelming amounts of debt; due to my naivete in believing that law school would help my bottom line I ended up consolidating credit cards, buying a car and ended up with a bank loan and shiny new credit card debt right before the economy imploded. In addition to my student loans. I had a dentist bill looming over my head. I was paying a certain amount on my credit card each month and once I paid off the dentist, I paid off my car, one month early. It isn't much but that was another chunk of money to send to the credit card and I did. And kept sending them that amount of money in addition to my previously normal payment.

Six months later, my bank loan was paid off and I was able to put that amount of money toward my credit card in addition. It still took another year to pay off. I'd be embarrassed to say the dollar amount but let's just say that I saw the money profile on CNN last year when it featured a social worker who wanted to go to law school. He had approx. $100k on credit cards. I felt downright fiscally responsible.

Incidentally, CNN gave him the same advice I've just given; pay the smallest one first (dentist bill, followed by car loan) and add those amounts to the next targeted debt. I didn't add my bank loan to my calculation for faster payoff as a) it was deducted automatically; b) ended in 6 mos; and c) had a lower rate of interest than the credit card. It made more sense to me to work on the credit card; each month would add more interest to that balance, which wasn't true of my bank loan.