Ever watch a hamster spin the wheel inside of its cage?
My daughter Kiera has a hamster named Violet. At least once every day I’ll find my kids in their bedroom giggling as they watch poor Violet spin faster and faster, her little legs pushing harder and harder. Where does she end up? Right where she started. Funny entertainment for my children, but a lot of work with no payoff for the hamster.
Many people with credit card debt feel like the hamster. Every month they send a large chunk of their paycheck to a credit card company, but just like Violet, they spin and spin, working hard, collecting a paycheck, sending it to the credit card company, again and again, never seeming to get anywhere.
This week I’m going to help you stop spinning the wheel and start making some progress.
Let’s avoid three common mistakes I see every day:
- Sending extra to every credit card. Why send as much to a low rate card as a high rate card? Pay off the cards that make sense first to improve your results. In an effort to pay off every credit card, people will pay extra to every card. We don’t want to do that. It’s too time consuming and you won’t see immediate results. Instead, I’ll teach you how to pay them down quickly.
- Paying off large bills first, while small ones linger. Start with the smallest debt first. You’ll create more cash flow to more quickly climb the mountain of taller bills down the road.
- Using the credit cards. How can you ever pay them off if you don’t change your habit? Stop using cards altogether to lower your debt load.
Paying off credit card debt is never easy, but it’s much more simple with a systematic approach. Not only does this method of paying off debt work, but psychologically it keeps you motivated to pay off more, something I think is half the battle.
Here’s the strategy:
- Create a spreadsheet with all of your credit card debt. Line them all up. List the name of the card, the interest rate, monthly payment, balance owed, and credit limit. Putting this information in writing will start your wheels spinning on how to pay it down faster. Updating it when the new credit card statement arrives each month will keep you motivated to stay on the debt-reduction path.
- Look over the spreadsheet and evaluate the balances due on each card. Are there one or two small ones you can pay off quickly? If so, we’ll start here. Take every dollar except the minimums due the remainder of your debt and send it to this card. You’re now taking your entire monthly financial weight and applying it to one debt. You can feel the hamster start to move the wheel off it’s base, can’t you?
- Once small cards are paid off, revisit your spreadsheet. Which debt has the highest interest rate? If two have similar rates, start with the card that has the smallest balance. Again, pay every cent you saved from the small card payoffs, plus all the extra money you were using for the small cards, plus the normal monthly payment you had been previously paying to this card and send it in. Now your wheel is picking up steam.
- Once this card is paid, look back at your spreadsheet and use all the accumulated minimum payments plus your extra amount to pay down the next card. At this point, you’re a debt-reducing machine.
This process works for two reasons. First, as I mentioned earlier, this method gives you some quick psychological “wins” on the road to relief. We all do better when we can see results. With this method, you’ll see the proof that you’re making headway when you pay off the first couple cards. By the time you reach cards with large balances, you’ve seen the positive impact your actions have had and you’re charged up to attack the next pile of debt. Second, you’re applying larger and larger payments to the bigger cards because you started with the smaller balance cards. By using all of your resources to pay down a single card instead of spreading the balance across many different cards, you’ve consolidated your approach. After awhile, the process becomes a game. You’ll run to the mailbox looking for the next bill, knowing that your hamster wheel isn’t spinning in place.