get out of debt

At the moment I consider myself debt-free because my short-term savings are about 1.33 times the amount of my debt. But my interest rate on the savings is higher than the debt, so I am not going to pay it off in any hurry.

Nevertheless, I have a positive cash flow now, so this is off my list.

Now my remaining debt is on only one card; and it is at a very low interest rate. In fact, the interest rate on this card (3.9%) is lower than the interest rate I’m getting on my savings account.

Therefore, I am running some numbers:
If I pay $400/month on this card, I will have it paid off in 3 years, and will pay a little over $852 in interest.

If instead, I pay $300, I’ll have it paid off in a little over 4 years, and pay $1160 in interest. If I put the $100 into my savings account, I’ll earn about $620 in interest. A difference of $540, more than the $308 I’ll save paying it off sooner.

I haven’t decided yet if I’m going to do this. I just found out I’ll be laid off at the end of June, and because I feel insecure now, I like the idea of saving the money instead of getting out of debt. After all, I would NEVER be able to borrow the money at this rate (I locked in the rate in ‘05), especially if I start to have income problems.

I have presently got more money in the savings account than I owe on the credit card. Therefore, I COULD pay it off at any time, if I needed to.

I’ve set up autopay for the minimum payment. One option is to “hide” the credit card debt in my Quicken account list, set up an automatic deposit of $100 into my savings account, and just forget about the whole thing. Let the minimum payments and the deposits go on being made every month, and try to think of myself as being out of debt.

For now I am moving this to the bottom of my 43 Things list. Who knows, I may not suffer a single day of unemployment (fingers crossed) and then when I know I have a job I’ll be able to pay the dang thing off immediately.

I paid off another credit card today. Woo-hoo!

I love this site; it gives me a place to crow.

I will be posting another log about this soon, with another graph.

This has happened to me before. Comes from being too eager to get this sucker paid off.

I scheduled a payment too early, and the funds were not yet available in my checking account. Ever happen to you? I didn’t keep in mind the fact that the Credit Union puts a 5-day hold on certain classes of deposits.

The payment bounced, not once but twice. Ouch! Each bounce costs $17 from the CU, and then there’s another $39 fee from the CC company. Most expensive of all: The interest rate will automatically be booted up to their dreaded Purchase Rate. BY AT LEAST 9 FULL POINTS! Hundreds of dollars! All this for making a payment that wasn’t even due yet!

But okay. I’ve been through this before. It’s been awhile, but I know how to avert this disaster.

First. Call the CU. Appeal to them. Get them to reverse their fees. While I’m at it, apply for a sufficient line of credit to be used as overdraft protection. This is the same process as applying for a loan (so kinda scary—feels like going backwards) but I know I will only use it in emergencies (such as having a Senior Moment about the 5-day hold on big checks).

Having done that, I have to sit and wait for it to show up on my card company’s ledger. Since computers do all the transactions, they don’t even know yet that a fee has been assessed. While waiting, it weighs on my mind from time to time, but I try to ignore it. To scratch that itch, I did a little homework on the policies of this particular CC company.

Today the fee showed up on the web site, so I did the next step, the most complicated one. Called the CC bank’s Customer Service department.

Every company is a little different, but for the most part, their customer service depts have two tiers. The first tier is the call-center person. The call-center person is there to answer basic questions and screen calls to the second tier. Sometimes they can also waive fees (most companies will allow a one-per-year courtesy waiver for late fees, for instance, as a matter of policy). In the case of this company, I know the 1st tier CS person would not be able to waive my fee.

I called and got the 1st tier person. I made nice, explained the problem to the clueless young woman with the Indian accent, and asked to talk to a supervisor. I listened patiently to her unhelpful explanations of why the bounced payment doesn’t appear on the bottom line. I explained again, briefly, why I was calling, and asked again, sweetly, to speak to a supervisor.

While I listened to their dreadful Hold music, I put the phone on Speaker and did a few little desk chores. A few minutes later, when the supervisor came on, I explained the sequence of events. I fudged a little of the story (“I was told the balance had cleared.” Well, yes. But I “was told” by the automated voice system, which doesn’t mention that this is not the AVAILABLE balance.)

In my experience, people on this tier are very nice, and very helpful. She kept saying, “not a problem” in her Georgia accent. She agreed to waive the fee and redact the interest hike. She explained that I would have to call back after the next Closing Date, to prompt someone (1st tier will do, now that Georgia made the notations in my records) to actually apply these rebates.

So, while that one last step, plus of course, making the actual payment again, will have to wait for another billing period, I am content for now to wait, hopeful that I’ve averted that interest hike.

I just found out today that my tax liability is over $7K. So that is going to put a crimp in my plans for this quarter. I will still make progress, but not as much as I’d hoped.

Another payday, another payment. Threw a big chunk of change at the debt today.

I estimate that at my current rate of repayment, I will have this licked by the end of april. That is, if my tax liability is not too high.

Today I ran an interesting set of numbers. I looked at my total interest payments for the past three years.

My interest was originally of 2 kinds, educational and personal credit card interest. At the point where I decided to snowball (in 2005), I moved my relatively high-rate student loans onto credit cards at a lower rate. This means I dropped the rate on 2/3rds of the debt by 2-3 whole points.

So, here are the numbers:
2004 Total educational interest = $3500
2004 Total CC interest = $2400
2004 Total = $5900

2005 Total educational interest = $2870
2005 Total CC interest = $2030
2005 Total = $4900

2006 Total educational interest = $80
2006 Total CC interest = $2620
2006 Total = $2700

The graph above shows it pretty dramatically, too. The point indicated by the red arrow is where I made the decision to snowball. There is an anomaly occurring 3 months later because of transfers of large amounts between accounts and the different dates they use to accrue their monthly charges. After that you can really see the effect.

I started the “snowball” strategy in November of 2005, after years of barely making progress on my huge debt. Now it feels easy, but when I look back, I was very depressed and discouraged about ever being out of debt.

Today to cheer myself up I scheduled another couple of payments, with a bonus this time. One of my accounts will be PAID IN FULL. I am also making my first big payment on the successor.

The one that is being paid off was over $30,000 when I started the snowball. Most of it was at fairly low interest, 5.9% and 4.9%, two “promotional” rates good for “the life of the balance.” There was a small portion, a little over $2000, that carried a 13.49% interest rate. The payment I scheduled today will wipe out all of the 13.49% debt.

The “successor” rate is almost entirely at 4.9% There’s less than $200 at a higher rate.

Anyone who’s had these promotional rates knows how easy it is to wind up with a portion of the balance moving to a higher rate. I am not sure what happened to get these amounts at the higher rates, but whatever it was, it happened a LONG time ago. The credit card companies apply your payments to the lowest-rate balance, so these hang around until the last dollar is paid.

In addition to the successor, I have two other accounts. One, with the largest balance, is entirely at 3.9%. That one will get paid last. The final one, less than $5000, is at 0%, but it will revert to a high interest rate in May. Therefore I will pay it off at the end of April. Meanwhile, the bulk of my payments goes to the 4.9%+ successor until it, too, is paid in full.

That, in a nutshell, is how “snowballing” works. It’s reversing the trick the creditors use on YOU: Paying the HIGHEST interest first, as best you can.

The graph shows the difference. It starts at the beginning of 2005 and goes to the present. It took me from November 2005 to January 2006 to move all the debt from high-rate creditors to the lower-rate creditors, but once that was done, you can really see how it speeds up.

I am reading this book by David Bach. The subtitle is, “A No-Fail Plan for Achieving Financial Freedom at Any Age.”

I don’t usually read self-help books. Too many of them are bunkum, and it takes too much time to sift the grain from the chaff. However, lucky me, I’ve got an excellent, well-qualified editorial assistant (so to speak). My mother is a voracious reader, reads a lot in this genre (among others) and has a professional background. She’s very discriminating, knows I’ll only tolerate receiving them if they’re in the top cut, short on New Age jargon, pithy and pointed. She has bought me two in the past few years, one on love and one on money. The money book is Start Late, Finish Rich.

I am liking it.

It is demystifying a lot of stuff about money. It also is making me feel good about stubbornly maintaining a high level of savings while I’m still in debt. Yes, I’m paying this off rapidly, but not at the expense of savings. I saved a little over $1000/month this year, and paid off debt to the tune of about $3000/month. However, adding in my employer’s contribution to my savings and the interest I earned, my savings actually increased by $2220/month.

So I’m going to read on. I’m sure I can find more ways to save and earn if I take this guy’s advice.

I just sent a buncha more money to my credit card debt. As my snowball program goes along, it’s also snowballing my obsession with this debt and getting it paid off. EVERY spare dollar is going to the cards, every spare hour is going to the paycheck, and every dream is on hold.