Every Dollar Matters

Formula To Eliminate Credit Card Debt

I want to talk about consumer debt. In particular I want to talk about your consumer debt and how you can eliminate it. If you are still reading then maybe are serious about taking action in this area of your finances. This is good. In providing this guidance I will be offering examples using a spreadsheet we created. We have made this free to you to use. Just click here to get it. You will need Excel 2000 or higher (It may work in earlier versions of Excel, though we have not tested it on any versions before Excel 2000).

For these scenarios we are going to assume you have $5000 on one card at a 15% interest rate. Further, the goal here is that after you are done walking through these scenarios that you will be able to apply everything I have covered to your own debt.

Never make the minimum payment

On our $5000 debt, if our card requires us to pay 4% of the balance each month and all we do is make the minimum payment it will take us 10 years to pay off the debt. We will have paid over $2100 in interest and we will still owe over $175 on the balance!

When we examine the monthly payment schedule you can see how quickly the minimum balance drops.

In one years time we are now billed being billed less than 3/4 of our first payment.

The Credit Card Trap

When all one does is look at the dollars involved the case could be made that things really do not look that bad. At the end of the 3rd year our payment is only $75.00. Of course this way of thinking assumes that you are not going to make any purchases on your credit card. Is this really a realistic scenario?

What ends up happening is that you get into the mentality of "I can afford to spend x number of dollars" paying my credit card bills. In doing this you continue to use you credit cards in a way that keeps this monthly payment around that monthly minimum. Unfortunately such a strategy does not really work that well and the urge to buy keeps inching up both your minimum monthly as well as your balance.

The sound of interest sucking your income dry

In the first year you are paying $646 dollars in interest to this credit card. That translates into a lot of Starbucks, 6-12 nights out for dinner and a movie, a new iPod, etc..., etc... . The reality is you are most likely going to continue charging on this credit card to maintain that $200.00 minimum monthly payment (or higher). So the annual interest is more like $750.00 a year with a duration of forever! Yes forever! The reality is that unless you start to payoff your debt you will stay in debt.


Credit cards are the ultimate form of slavery and bondage. At least with a loan their is a single point of purchase for goods and/or services. There is a beginning and end to the payment schedule. With credit cards there is no beginning and end. Many credit card lenders have raised the minimum monthly balance to 4%. It can still be lower than this. I could spend 50 pages getting into the details surrounding this but such a rabbit trail is not going to produce any good fruit for us. Our goal is to reduce your debt to 0. Just keep in mind that your card may be requiring you to pay less than 4% on your balance. The less you are paying on the balance each month the more you are paying in interest. If we change the 4% minimum monthly to 2% (which was not too long ago where every card company was at you can see the dramatic change.

If paying on a $5000.00 debt for 10 years costing you $4957.00 in interest and still only paying off 60% of the total debt does not make you sick to your stomach then I do not know what else I could possibly say to convince you that these lenders want to trap and enslave you.

Do Credit Cards have a purpose

Certainly, but you have to be very careful. Credit cards are a great convenience when you are traveling. If  you have to travel on business let your company provide the plastic for you. If this is not an option you want to make sure you payoff your balance when it is due. You should never take a vacation on your credit cards! Have the money for your vacation in the bank. Immediately after you return home write the check and send it to the lender.

Credit cards can represent a quick line of credit (at a high price) in times of emergency. You really should have savings for these situations, but we realize how easy it is to your finances upside down. If you have to use a credit card for an emergency create a payout schedule. For instance, if you need to put $800 on your card to fix your car, plan to payoff the loan over some duration that your budget can absorb.

Making a consistent minimum payment

Scenario #1

If we go back to our first scenario. We owe $5000 on our credit card at 15% interest. Our monthly payment on this balance is $200. If we can afford to send the credit card company $200.00 the first month, then we can certainly afford this amount each month. By consistently making this payment we can payoff our debt in 30 months.

Our spreadsheet allows you to quickly set up these schedules to payoff your debt. I feel so strongly about reducing debt that I decided to give this spreadsheet away for free.

Scenario #2

Okay, two and a half years is a long time for many of you. What is to prevent you from charging more debt on this card? Is there a way that can work for you without having to immediately cut up the card?

If you decide to payoff this debt off over a 5 year period it is going to cost you about $120 a month. Take the other $80 and start a savings account. This is going to become your emergency fund. Once it reaches a certain amount you can take that $80 and put it back into the budget to spend on items that you were previously charging on your credit cards.

Final Thoughts

Back in the early 80's my spouse and I fell into the credit card trap. We were a young couple barely making end meet. We had about $7000 in credit card debt on 4 cards. That in today's dollars is about $20,000. It took us 3 years to become credit card debt free. We have been able to stay credit card debt free ever since. If we did it so can you.

Whether you have 1 or 10 credit cards you can apply the advice I have offered to your finances. It really does not matter how deep you have dug the hole for yourself. What matters is that you make the decision right now that you are going to start digging yourself out of your credit card debt. The choice is yours.