Rainy Day Pennies | Debt Free Living and Personal Finance

Last year I finished paying off $35,000 worth of credit card debt. I was unemployed for about a year. When I found a new job, I took a significant paycut. My debt to income ratio was about 78%. I did not declare bankruptcy, or settle with the credit card companies. I paid it off completely in 5 years.  I lost weight too!

Starting off with a big caveat, the details of what worked for me will not work for everybody. There is a huge precondition to how I made this work: I had excellent credit to begin with, and I fought aggressively to keep it. I also had a few advantages in my favor. I was single with no dependents. No car payment, mortgage, or student loans either. The concept, though, is the same as all get out of debt strategies – spend less than you earn, and make sacrifices.  You have to do what works for your unique situation.

9 Steps to Paying off $35,000 Debt in 5 Years:

1. Transferred balances onto one 0% offer.
2. Bounced between one 0% offer to another for 5 years, paying the transfer fees.
3. Paid minimums and paid on time!
4. Contributed all extra money to an emergency savings account
5. Cut back on expenses and lived frugal.
6. Net worth of zero when savings = debt.
7. Planned to pay it off when net worth = $3,000
8. Borrowed money from family when balance transfer terms became unfavorable.
9. Paid family back in full in 3 months, as promised.

1. Transferred balances onto one 0% offer.

Frugal Dad recently called paying the minimums until you have enough saved to pay it off the Recession Proof Snowball. Mine is very similar. I consolidated to 0% transfers instead of paying off the smallest to highest debts.

2. Bounced between one 0% offer to another for 5 years, paying the transfer fees.

I transferred all my balances onto one 0% offer so I had only one payment. I paid the balance transfer fees, which were capped at $75. This was a lot less than paying the interest on each of the cards. I threw every extra dollar I had available at the debt. Some people call this the ’snowflake’ method, which is a variant of the ‘debt snowball’ method popularized by Dave Ramsey. This did not work for me. Whenever I had something unexpected come up (car repairs/maintenance), I charged it on the card. Seeing my debt balance go up,down,up, down made me feel like I would never get out of it. I decided to do something ‘radical’. I setup a savings account.

3. Paid minimums and paid on time!

I paid the minimums on my credit card. I paid on time, every time in order to avoid incurring late penalties or fees*.

4. Contributed all extra money to an emergency savings account

All extra money was deferred to the savings account instead. This worked better for me. I felt more secure with a growing cash account available. I reprioritized so my credit card debt would only go down.

5. Cut back on expenses and lived frugal.

I cut expenses where I could. I learned how to cook watching Rachael Ray’s show "30 Minute Meals" and Alton Brown’s "Good Eats". I bought a crockpot, and learned how to cut up my own chickens. I became a pretty good cook, and lost weight. I did not spend money on iPods or computer upgrades, although I really wanted to. I wanted to be out of debt even more. Anytime I was tempted by a new gadget, I thought about how my life had been impacted by debt.  I lost my freedom. That usually did the trick.

6. Net worth of zero when savings = debt.

Eventually, the savings balance equaled my debt, which meant I had a net worth of zero! A major milestone after being negative for so long.

7. Planned to pay it off when net worth = $3,000

I did not pay it off immediately. I planned to let it grow until I had a positive net worth of approximately $3,000 (3 months of expenses). I noticed 0% transfer rates started to dry up. One of my cards removed the balance transfer cap completely. Balance transfers would now cost more than paying the interest if you weren’t paying attention! Sneaky. My Bank of America card raised my regular rate from 4% to 18.99%, even though I had been a long time customer and never missed a payment. Their letter to me said they were raising my rate to 18.99% due to my high balance, which was about $3,000.

8: Borrowed money from family when balance transfer terms became unfavorable.

I called my parents and asked for a loan of $3,000 to pay it off.

9. Paid family back in full in 3 months, as promised.

Sent the check, and paid my parents back.  CYA Bank of America – I’m Free!

It was not easy or quick, and I did not execute it flawlessly. Looking back, there were a number of areas that I could have done better.

How are you, or how did you, pay off consumer debt? Are you doing a snowball, snowflake, or your own method?  Does it work better for you with a small or large emergency savings account?

Related Stories:
Everyone Needs An Emergency Savings Account
How to Cook When You’re a Single Professional

*I got my due dates mixed up once, and was charged a $35 late fee with an increased penalty rate. I called the credit card company, and they refused to drop the fee or the penalty rate. I immediately transferred to another 0% offer I had available. There was no effect on my credit score.

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Debt by Cathy