DIY Debt Payoff #2

Mar 6, 2012 by

This is the second post in a short series providing a step-by-step guide to creating and executing a do-it-yourself debt repayment plan.

Step 1 Review

Post #1 of the DIY Debt Payoff series described the steps for laying the foundation for a self-made debt repayment plan: Contact each of your unsecured debt creditors and ask for relief. With that done, now you can sketch out a plan of attack.

Your Debt Repayment Plan

Let’s say you’ve got $400 per month to throw at your unsecured debts. But how much should you send each creditor? To pay off your debts with the least amount of cash, follow these simple steps. (If you’re computer savvy, a spreadsheet is perfect for this.)

  1. List your creditors on a sheet of paper or spreadsheet, from lowest interest rate at the top of the list through highest rate at the bottom.
  2. If two or more creditors have the same interest rate, list them starting from highest balance to lowest balance, like I did with Chase and Citicard in the whiteboard example to the right.
  3. For all creditors except the last—which is the one with the highest interest rate—write next to it the creditor’s required minimum monthly payment.
  4. Add up the minimum monthly payments you’ve listed—$255 on the whiteboard.
  5. Subtract this total of the minimum monthly payments from the amount you’ve decided you can afford to spend monthly on debt repayment. In my example, $400 – $255 = $145.
  6. Send monthly all of this difference, or remainder ($145), to the last creditor on your list, the highest interest rate lender. And send the required monthly minimum payment to each of your other creditors.
  7. Be sure to pay every creditor before the due date.
  8. If you come into any “extra” money—a bonus, a tax refund, unexpected overtime—send it right away to your highest interest rate creditor (Capital One on the whiteboard example).
  9. Update your list monthly. If any creditor cuts its minimum payment, add the cut to the remainder you’re sending to your highest APR lender. Using the whiteboard example, if Target reduces its minimum payment by $5/month to $80, then pay Capital One $150 instead of $145. The key is: You always pay $400/month. The method explained here is to figure how to divide the $400 you have to pay toward debt among your creditors.
  10. As you pay off the last, highest rate debt on your list, repeat steps 1-6. If any creditors change the minimum required payment or interest rate, re-do your list so your creditors are always listed from lowest APR at the top to highest APR at the bottom.

Tempting to Pay Off Small Balances First?

With the method described above, you’ll pay off your debts with the least amount of cash. But if you have one or two accounts with very small balances and it would make you feel good to get them paid off quickly, send them the remainder (what’s left after you pay every other creditor their monthly minimum), even if the APRs on these accounts are not the highest you’re seeing. It feels great to cross a creditor off the list. Then move ahead with the payment plan steps above.

Next Post in the DIY Debt Payoff Series

This series’ third post will outline how to factor into your plan overdue or overlimit credit card accounts, and what to do with medical debts and debts held by collection agencies.

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