After seeing Lava20's diary on how to beat the credit card companies at their own game, and reading the comments from people who had ideas of their own about how to eliminate credit card debt -- and the laments of some commenters who needed more help -- I didn't see anyone who had tried the method that I used.
I started to write it into a comment, but it was so long, it merited its own diary.
Let me preface by saying, I am awful with finances and something of a procrastinator, so it's easy for me to get into trouble managing debt. This method worked for me because it was so damn simple, and entirely goal-driven. Follow me below the fold for the explanation.
Around the summer of 1997, my wife and I looked at our debt and decided we didn't want to be paying interest to credit card companies and the like. Our household income at the time was around $65,000 a year, and when you added up the balances on our credit accounts, a car loan and a student loan, it came to around $7,000 (not counting the house, which we accepted as an affordable debt we would continue to carry as-is). Not bad, but the amount also never went down because we were stuck in the mindset that we were getting by just fine, and making the minimum payments. But we decided that just getting by, and giving away interest to creditors was not in the best interests of our family. Here was our plan, step by step.
1. We decided that the Millennium, 1/1/2000, should be our goal date by which we would be debt-free (except for the house). The car loan and the student loan would each be done by then.
2. For the credit accounts, we took the balance on each one, and divided by the number of months between June of 1997 (when we did this) and January of 2000, which was 30.
3. Each month, the dollar figure we calculated for each account was then added (and this is the MOST important part) to the FINANCE CHARGES for that account. The sum of our monthly set amount toward the balance PLUS the finance charges was what we paid on each account every month.
4. This is the SECOND MOST important part. You can't use the cards/accounts during this time. (If you slip up and do, it may not be the end of the world, or your goal. But, you then MUST recalculate the amount you send to reflect the new total balance. The consequence of this is that you could raise the monthly amount you're paying above what you can afford to pay. And then you really will have screwed your goal.)
It worked! Not only did the amount we paid get smaller and smaller every month -- which was a blessing in itself. But we actually got done three months early!
Let me first say, this was not my idea. I learned it from somewhere else, and to be honest, I cannot remember the source. To someone who works with money, this may seem very elementary, but the simplicity of it is precisely why it worked for me, because I am an absolute dunce with finances.
And let me also add that, while the method is simple and easy to explain (set your goal, divide your balance by the number of months between now and then, add the finance charges, and pay the sum of the set amount plus finance charges), it is by no means easy. Getting started requires some effort and decision-making, and the first few months, if you do it right, will put your spending right on the edge. The good news is, with every successive month it gets easier because, as I said, the amount you pay out goes steadily down.
For some, choosing a goal date/horizon date can be tough. The Millennium was an easy one, but choosing a date arbitrarily may be difficult for some folks. Choose a milestone anniversary or birthday; the day your kid starts kindergarten or graduates high school; the day your 401k matures; whatever. Make it something important and positive.
Then once you've got your date chosen and you've done your calculations, you have to decide if you can afford the payment amounts you've established for yourself. How close to the limit do you push it? How soon do you want all that debt behind you? You have to use your current-month finance charges, but remember, these are the highest they are ever going to be. Every successive one will be smaller as the balances decrease. Nonetheless, if you decide the amount you've created is something you can't afford, you have to re-set your horizon date for something farther out. Disappointing, but that's what you have to do.
There's also some discipline involved in opening each bill every month, looking up the finance charge amount and adding it to your monthly share. If you are rushed when you're doing it, or the kids are bugging you, or you're otherwise distracted or undisciplined, it's easy to fall off the wagon and slip back into "we're getting by just fine" and "I'll just make the minimum payment."
But the flip side of this is that, if you're too lazy/distracted/undisciplined to make your calculations, the easy way out is to send in the same amount you did last month. It should be easy enough to remember (it'll be on the bill -- duh!), and will actually be MORE than you should be sending, so you'll be AHEAD. This is how my wife and I actually got done early. Those occasions when we sent too much added up. And as we got close to the end, some of the amounts were so small we could send a little extra or close them out completely ahead of schedule.
Of course, we rewarded ourselves by going and buying two cars with two loans in the first week of December 1999. But from our lessons learned, we were able to pay them off early, too.