Photo by southtyrolean

“Listen, and understand. That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.”
- Kyle Reese, from The Terminator

Just replace “terminator” with “interest” and we can apply Kyle Reese’s statement to credit card debt.  I guess Reese never owned a credit card.  Good for him.  All he had to worry about were Terminators.  He had it easy.  For those of you saddled with credit card debt, I sympathize.  I once walked among you.  But I escaped from the nightmare world of never-sleeping interest, and so can you.

The Citi never sleeps

There used to be a commercial in the 1970’s, where the tagline was “the Citi never sleeps.” It was a commercial for Citibank, a subsidiary of Citigroup, who I’m sure you’re familiar with if you carry credit cards.  The slogan sounds quite insidious, don’t you think?  They should change the slogan to “the accumulating interest never sleeps”, but while it’s more accurate, it’s much less catchy.  An even better slogan would be “the debtor loses sleep”, because that’s what happened to me when I carried credit card debt.  I’m sure my story is similar to many of you out there.

It started with the house

After buying our first house, my wife and I got caught in a cycle of growing credit card debt.  We used as much of our savings as possible for a down payment.  While this lowered the amount we borrowed on our mortgage, it left us with little cushion for any unexpected expenses.  Those of you who have older houses know all about those.  Between home improvements and car repairs, we racked up quite a bit of credit card debt in a short period of time.  The Terminator went to work while we slept.

A few miserable years

After taking stock of what we owed, we proceeded to develop a debt repayment plan.  We took a hard look at our monthly expenses, and made the necessary cuts to lower our spending.  Then we did a calculation of how long it would take to pay off all of our credit cards.  After our jaws hit the floor, we recalculated, and came up with the same result.  With the cuts to our entertainment budget, we were in for a few trying years.  It was our first strike back at the Terminator.

Things start to look up

First, we stopped using credit cards, cold turkey.  We threw every extra dollar that was left over at our debt.  Every raise was sent to Citigroup, or MasterCard, or Sears.  Any windfall that came our way went to knocking down the principal.  We were using a debt snowball before I ever heard of Dave Ramsey.  Finally, after years of poor raises, I scored a job that offered a significant jump in salary, and we started to make some headway into our debt repayment.  The Terminator was on the ropes!

On a roll

We stuck to our plan, and eliminated our credit card debt.  We took the extra cash flow and started to chip away at our mortgage.  After several years of additional sacrifice, we were mortgage-free.  Let me tell you, it’s nice to have a positive cash flow.  SkyNet had been defeated!

Now that I’m older and wiser, here’s some advice to prevent you from going into debt:

Wait to buy your first house - renting isn’t “throwing money away”, as many will have you believe.  We could have stuck it out in our apartment for a couple more years, and saved more money in the meantime.

Start an emergency fund before you buy a house - trust me, as soon as you put the key in the door, something will require fixing.  Plan ahead.  Don’t put your repairs on your credit card.

Set up a budget before you get your mortgage - set your own limits now, before you get too accustomed to just winging it.

Don’t put down every cent that you have - while it’s nice to have a smaller mortgage, don’t hamstring yourself by leaving no liquid cash.  Keep something on the side.

Pay cash - at least until you’re sure that you have the discipline to pay off your credit card balance every month.

But, if you’ve already got the Terminator on your back, here’s what worked for me.  I warn you, this will be painful:

Stop using the credit cards - I know, duh, so obvious.  But you’d be surprised how easy it is to use the cards “just one more time.”  Stick them in the freezer if you have to.  I told you this would be painful.

Make a budget - it doesn’t have to be an elaborate one, either.  Find a format that works for you, and get cracking.  You can find mine in this post. You’ll be surprised where all of your money goes.  Ignorance is not bliss when it comes to personal finance.

Start an emergency fund - start putting some money away.  How much is up to you.  I’d recommend doing an analysis of any potential short-term risks, such as car repairs, home repairs, or medical expenses, and save accordingly.

Use the debt snowball - this is the Dave Ramsey method.  From your budget, you’ll be able to determine how much you can throw at your debt each month.  This is your monthly debt allotment.  Pay the minimum on all of you cards except the one with the smallest balance.  Add up the total of these minimum payments.  Then, subtract that number from your monthly debt allotment, to determine the amount to be paid to the smallest card’s balance.  Pay this amount on the smallest-balance card.  This strategy ensures that you’ll be paying off more principal, and help you eliminate one debt at a time.  It keeps the momentum going, and gives you a short-term goal to shoot for.

Or, use another method - some argue that Dave Ramsey’s method doesn’t take into account the difference in interest rates.  I’m one of them.  I prefer to pay the minimum on all of the cards except the one with the highest interest rate.  Then, pay the remainder against this card’s balance.  You’ll be knocking down the balance on the card with the highest debt.  It may delay your gratification of paying off a card, but will lower your interest payments in the long run.

Throw any “found money” at your debt - if you get a raise, don’t grow your lifestyle, put it toward your debt instead.

Don’t neglect your investments - continue to invest in your company’s 401(k) plan.  Contribute enough to get matching contributions from your employer.  When your debt is paid off, you can shoot for fully-funding your 401(k).

Pay off your mortgage - I know that right now, this appears to be a far-off pipedream.  But if you stick to the plan, you’ll be able to pay off your mortgage eventually, and say Hasta la vista to the Terminator.

For those of you interested in Dave Ramsey’s method, click on the picture for his book:

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