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Back in 2002, my soon-to-be husband and I graduated from a top-twenty school with $80,000 in student loan debt plus another $10,000 in high-interest credit card debt (mostly retail store cards). Before long, we’d tacked on an additional $25,000 in car loans. Then, we dropped another $15,000 on our wedding. (That’s $130,000 for those of you keeping score at home.)
We faithfully paid the minimums each month, having resigned ourselves to being in debt probably forever. But it was okay! We could afford all those small little minimum payments; we had good jobs and no kids and even socked a little bit away each month in our retirement accounts. We bought a nice little “starter home” in a good school district and upgraded our cars. Besides, everyone else we knew had debt as well, including our parents!
Fast-forward to 2007. This is when I discovered Dave Ramsey. I can’t exactly remember how I came across his radio show, but after a few episodes I was hooked. It made me realize just how close we were to catastrophe. If one of us lost our jobs, what would we do? We only had some retirement savings and a little equity in the house. We had no savings. Where was all of our money going every month?!
All. That. Debt.
It was crushing us and I didn’t even realize it.
Dave listeners will no doubt be familiar with the term gazelle intensity. Basically, it means to become as focused on getting out of debt as a gazelle running from a cheetah. I sold EVERYTHING on Craigslist in our house that wasn’t essential. I canceled cable. I held a yard sale and sold $500 worth of junk sitting in my garage. I became an expert at couponing. We stopped eating out (except for Taco Tuesday, because $1 tacos are amazing and it was already a tradition among a large group of friends… so this way we could still be frugal and go out and have a good time).
I took side jobs doing sports team photography and commissioned pencil drawings. I even hand-lettered thousands of wedding invitation envelopes.
Actual photos of some of my side hustle work!
I listened with envy as other people called in to do their Debt-Free Scream (a sort of rite of passage once a person paid off all of their debt, with or without a mortgage). I vowed to be one of those people and set a goal of calling into the Dave Ramsey show and screaming, “We’re Debt Free!”
I purchased Dave’s book, The Total Money Makeover, and read it in a day. I bought the fancy envelope system and documented every dollar spent. Whatever cash was left over at the end of the month got deposited into a separate checking account, and I sent a check to whichever account had the lowest balance in an effort to get it paid off faster. Before long I was sending the equivalent of my monthly salary to our debt.
Shortly thereafter, a little offer showed up in my mailbox. “0% APR for 18 months on purchases and balance transfers!” screamed the little red letters on the front of the envelope.
A little lightbulb went off over my head. If I could transfer some of that higher interest debt to this new card, wouldn’t I be able to pay off that debt much faster?
I took that sucker up to the limit ($10,000) with a balance transfer of three smaller, high rate cards. (There was a 2% balance transfer fee, so it is not totally free, but 2% is still less than 18%!) Not only did this mean more of my dollars were going to principal rather than interest, but consolidating three payments down to one freed up extra money that I could then put toward the debt with the next highest rate.
This is the day that marked my departure from the world of Dave Ramsey. In Dave’s world, the use of a credit card for ANY reason is vehemently discouraged. I can’t imagine Dave would be a fan of balance transfers either. Additionally, Dave tells listeners to pay off debts in order from smallest to largest, without regard to interest rate. This is called the debt snowball method of paying off debt – as you pay off each debt, that payment is added to the next smallest debt until that one is paid off, and so on. Back then, I did not know there was a name for the alternative path of paying debts in order of interest rate instead. This is called a debt avalanche, and for good reason. Paying debts in this manner can save hundreds of dollars of interest and pay down the debt faster.
Once I accepted the first balance transfer offer, more offers started coming in. I remember thinking, The sharks are circling! I was tempted to throw some more of the high interest debt onto another card, but I wanted to be sure I could pay off the first balance after 18 months. So I kept an eye out for the best deal and when the 18 month mark approached on our first balance transfer, I had a second balance transfer offer ready to go. This one was even better – zero percent interest for 18 months and NO fee, and they sent me a blank check. By this time, all the rest of our high-interest debt had been paid using the debt avalanche method and throwing every extra dollar that came our way at the debt. Because this card sent me a check that I could just deposit in my checking account, I was able to “pay off” the previous card’s balance as well as send a little extra payment on a 6.8% student loan.
The first balance transfer offer alone saved me roughly $2,500 ($10,000 balance x 18% interest over 18 months = $2,700; minus $200 balance transfer fee). The second offer is tougher to calculate exactly, since the debts consolidated under the offer had different interest rates, but it would probably be at least another $2,000.
However, paying down the debt at a super-accelerated pace was the biggest factor in determining how much money I was able to save on interest charges. I don’t have all the original numbers from my loans and credit cards, so I can’t determine an exact number, but I estimate the number to be around $30,000 (I used the loan amortization calculator at https://www.amortization-calc.com/loan-calculator/ and used 7% as an average interest rate for all my debt).
By combining the balance transfer offers, the debt avalanche method and a healthy dose of frugal living, I was able to pay off our remaining $90,000 of debt in less than three years and save tens of thousands of dollars in interest.
Three years still sounds like a long time, especially to be focused on something as boring and unglamorous as paying down debt. However, when I realized we’d already been paying on our debt for five years and the balance had only dropped by $40,000, it was a no-brainer.
The Fine Print
Of course, these methods of debt payoff come with their own drawbacks. Balance transfer offers require strict discipline and responsibility. Side hustles can suck up all your free time (and energy!) and it is really, really hard to say no to nights out on the town and shopping sprees. However, the feeling of paying off that last debt is a feeling like no other!
I recommend only using balance transfers to help pay down high-interest debt, and only after you have familiarized yourself with all the terms and conditions! These offers can be tricky to navigate. Here are some suggestions on handling balance transfers responsibly.
- Be aware of the balance transfer fee. Most balance transfers carry a fee, usually 2-5% of the balance, that is tacked on to the total amount transferred. For a $10,000 transfer, this would mean a fee between $200 and $500. There are $0 transfer fee cards out there, but they are few and far between and usually reserved for those with excellent credit.
- Don’t use the new card for any other purpose until the balance transfer is paid off. New purchases are usually given the regular interest rate, and when you send your payment in, it is applied to the balance with the promotional rate first. This means all of your purchases will sit there accruing interest at a high rate as you cannot pay down the new purchases directly.
- Have an exit strategy in place. When the promotional period is over, the interest rate goes back to the regular, higher rate. To avoid paying interest on the balance, it must either be paid off or transferred before the promo period is over. Because balance transfer offers are not always guaranteed, I would recommend either breaking the balance up into equal monthly payments so that the balance is paid off by the due date, or to have enough cash in a high-yield savings account to cover the balance when it’s due.
- Once the card is paid off, don’t close it! Your credit score is made up of several factors, including a debt-to-credit ratio (how much debt you have vs. how much credit you have available across all your credit lines) and the length of time your accounts have been open. Cut the card up if you have to in order to keep from using it, but closing it may mean a drop in your credit score which may affect your ability to get new credit in the future.
Stay tuned for part 2 of our story: Debt-Free! Now What?
Can these methods work for you? Try unbury.me, a free debt-reduction tool that compares the snowball method vs. the avalanche method and calculates your debt-free date based on payment information you enter. For low balance transfer offers, sign up for a free Credit Karma account and check out their personalized recommendations for cards based on your credit profile. (This is also a great site to monitor your score and credit report and it’s totally free!) Finally, open a free account at Personal Capital and start tracking your spending and net worth.
Get started on your own path to financial independence!