As mentioned in my “Year in review” post, one of my goals for 2020 is to further reduce my credit card debt. So in this post I just want to talk about how I plan on achieving this goal as well as the kind of tools I’ve been using and I’ll give my thoughts on some tips that I have learned thus far. Before I begin, I do want to start off by saying I was very irresponsible with my credit cards, buying things like a guitar or car parts for my mustang (which I don’t have anymore) that I couldn’t afford. I also hurt myself by blowing through the Florida Pre-Paid funds my parents had saved up for me a year and a half before I was able to graduate, causing me to use my cards because I did not want to get into a student loan at the time.
During the fall semester of 2018, I took a finance course at FIU that finally forced me to look at my finances with a magnifying glass. Prior to that however, I was already trying to scale back on my spending, buying things that were needs instead of wants. Although I would spoil myself on video games here and there, for the most part I restrained myself from making unnecessary or large purchases. With that said, it’s thanks to the finance class that I understood the importance of making smart financial choices as well as the importance of investing for the long term.
Tools
One of the tools I continue to use to help me stay on top of my spending is the Mint app which I check maybe multiple times a week. In this app, you’re able to add you’re bank accounts, credit card accounts, and even investment accounts. While your accounts are linked, you’re able to track your monthly spending and categorize purchases. The app automatically categorizes the purchases for you but it’s not always accurate. But after setting up a monthly budget, you are all set to fully utilize the app.
Another app that I still have installed but use less frequently is Personal Capital. This app lets you set up all the same accounts that Mint does but it’s focus is slightly different. Personal Capital lets you see and track you’re net worth more easily than Mint does. Net worth is an important figure in that it allows you to get the overall picture of your financial well being which can help you set your sights on a tangible goal. As of now my net worth is negative, meaning my combined liabilities (credit card balances + loans) are more than my assets (cash + savings + investments). However, the app doesn’t hold up to Mint when it comes to budgeting because I feel it doesn’t have a user friendly interface.
There are plenty of other apps out there that I won’t begin to mention that are able to serve your budgeting needs. You can just find the one that works best for you.
Information Sources
I like to think that the finance class was a huge help in getting me in the right mindset to tackle my finances but it is the Listen Money Matters podcast that helps me stay on track. It wasn’t long after I completed the class that I decided to look for more sources of information on money that were easier to consume and this podcast does not disappoint. The podcast hosts make it very easy to understand the material that they happen to discuss on any particular episode. They also bring on guests that may be more knowledgeable than they are or are doing something different that earns them revenue. I definitely recommend this show as it helps me stay motivated and informed.
As a consequence of listening to the podcast, I was turned on to a book called I Will Teach You to be Rich that I have read about halfway. The reason that I have only read half the book is because I find it better to follow along as you achieve the steps presented at the beginning of the book. One of the first steps that I executed was to get a bank that did not charge any fees and has a really good savings rate. Savings rates are usually low relative to the average gains in the stock market, yet having proper bank accounts sets you up to achieve your goals. Nowadays there are banks that offer a nearly 2% rate for their savings accounts because they mainly exist online. I followed this advice and moved away from Bank of America to Simple Bank, a purely online bank.
Methodology
Thanks to the tools and information that I have gained, I want to talk about debt elimination and my personal journey for getting rid of it. There are a few options when it comes to reducing debt, they are: the debt snowball method, the debt avalanche method, and debt consolidation/refinancing.
The snowball method requires you to look at your credit card balances to pay off the lowest balance first while paying the minimum on your other accounts. This method gives you the satisfaction of getting rid of certain card balances quickly. The drawback lies in the possibility that one of the other cards has a higher interest rate which will end up costing you more over time. On the other hand, the avalanche method, which I prefer, tackles that problem head on. With this approach you pay off the card with the highest rate first saving you money down the road.
Debt consolidation and refinancing usually are synonymous in that you move your credit card balances from high interest to a lower interest account. There are usually two ways to go about it, one way is through a loan and the other is with a balance transfer. With a loan, you will be able to enjoy lower rates but can get yourself back into trouble if you don’t watch your credit card spending.
Many times, you’ll see credit card companies that offer a promotional rate of 0% APR on balance transfers over a specified period of time. This is an approach that I have taken advantage of recently only because I know I can payoff the balance before the promotional period ends. That is very important to keep in mind because balance transfer rates are just as high, if not higher, than credit card rates.
Journey
Since the beginning of my journey, I have been able to completely eliminate the balance on one of my credit cards thanks to receiving extra income and using some money that I had saved up. I immediately noticed my credit card rates lowered across the board and my credit score shot up by 20 points. I then focused on the card that had the highest interest and put the other cards on automatic minimum payments. This doesn’t mean I don’t use my cards, I actually use them all the time to take advantage of the rewards programs that they have. With the help of my budget I know how much I can spend for the month and I keep track of the purchases per card in my notes that way I can pay back everything that I spent before interest gets charged on the balance.
After a couple of months, I was then offered the chance to do a balance transfer with a credit card that I already own with Chase. This was beneficial since I did not have to go out and get approved for another card. Plus this account was already eliminated previously so it did not carry a balance, which helped me decide what to do. I worked out the math on the payment schedule I needed to follow to avoid going over the promotional period and calculated that I could pay off the transfer within 9-10 months.
This now became my main focus since paying interest free is higher on my to do list. I reworked my automatic payments to reflect this shift and I am confident that this will work out to my favor. Once that balance gets minimized on my Chase card, I will look to see if there is another balance transfer opportunity to jump on. If not, then I will go back to the avalanche method, paying off the highest interest card first.
I hope you enjoyed reading this article as much as I did writing it. Please let me know if you have any questions for me and whatever financial situation you currently find yourself in there is always the opportunity to better yourself.