Debts & Loans

Okay, here are the meat and potatoes of Debt Consolidation Loan Application. These five steps will show you how to get out of debt and stay out. This isn’t a quick fix that eliminates your debt all at once. You will be paying off your debt each month until it’s gone. Depending on the size of your debt (not including your mortgage), it can take anywhere from 2-4 years, if not longer. You must have patience and discipline for you to succeed.

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This plan was originally derived from Dave Ramsey, author of the Total Money Makeover. I’ve modified it slightly and made it a little simpler. It is the best debt reduction plan I’ve seen and it has worked wonders for me personally. All you need is your computer, or a pen and paper. This 5-step process originally appeared in my first book, Live Simple Get Rich.

Step 1: STOP USING YOUR CREDIT CARDS! This is the obvious first step. You must stop using your credit cards. Take all of them out of your wallet and cut them up. That includes American Express, gas cards, department store cards, home improvement stores, and boutique store cards. Anything that resembles a credit card gets cut up. You can keep your ATM card. If this sounds a bit harsh, well, it is. The only way out of debt is to go cold turkey. You can’t ease your way out of credit cards. If you can’t summon the will to cut up your credit cards, then you don’t have the discipline to get out of debt.

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Step 2: Gather your latest statements. This should include all of your credit cards, lines of credit, loans, your car payment, and your mortgage. On your computer or a piece of paper, write down the name of each card, the minimum monthly payment and the balance. Order the list from the smallest balance to the largest. Total the balances. See below for an example.

Step 3: You’re going to pay off the smallest balance first and work your way up to the larger balances. Other financial experts would have you pay off your largest balance first, or the account with the highest interest rate. There is some logic to paying off the largest balance first. However, what is missing is the positive psychological effect of achieving a goal; the goal being pay of a debt. By starting with the smallest balance first; you’ll achieve the psychological satisfaction of paying off the debt faster than waiting years to pay off the largest debt. Focus on paying off the smallest debt first. Pay the minimum monthly payments for all other accounts. Since you are no longer taking on new debt (you did cut up your credit cards, didn’t you?) your balances will go down slowly but surely. If you pay more than the minimum for the smallest debt, please do so. The faster you can pay off the first debt, the easier it will be to pay off the rest as we’ll soon see.

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Step 4: After you’ve paid off the first account, congratulate yourself! Now comes the fun part. It’s what Dave Ramsey calls the “Snowball Effect.” You’re going to take the payment you were making on the first account and apply it to the second account on top of what you are currently paying. As an example, take a look at the table from Step 2. You’ve just finished paying the department store debt of $245. You’ve been making the minimum payments of $12. Now, you’re going to take that $12 and add it to the VISA account payment of $20 for a total payment of $32. The VISA account will now be paid off almost twice as fast because of the additional payment. The snowball effect really kicks in after you’ve paid off a few accounts. For example if you’ve paid off the first four accounts on the table, your monthly payment for the fifth account would be $107.

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Step 5: The final step is to repeat until your debts are paid in full. Normally, all of your credit card and any unsecured loans and lines of credit will be paid off first leaving your car loan and mortgage.