When I was a college student in the late 90s, I worked part-time at a women’s clothing store in the mall. At the time, many students worked in the mall, and the pressure was not only to sell goods, but also to ask people to apply for credit cards. Do you remember the days when a salesperson asked you if, as a buyer, you “want to save ten percent today when you apply for the [insert name of store here] credit card?” Or, as a part-time retail employee, receiving a request from another part-time employee at another retail store in the mall: “help me meet my quota credit card and apply for a credit card?
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 changed how, if, and when people are asked to apply for a credit card, but by the late 1990s credit cards were popular. As a full-time student working three part-time jobs and learning to manage my financial situation, I had over a dozen credit cards. Most of those credit cards were unused (and on my credit report nonetheless), but those with balances were another story. At one point, I felt overwhelmed. How did I get into this mess? How could I fix it? I took the time to read about debt management strategies and picked one that worked for me.
Here are three approaches to debt management spelled out with the acronym SAD for Snowball, Avalanche, and Debt (Consolidation).
Before we dive into debt management strategies, let’s see where to find information about your debt. While many banks and credit card companies offer information about your credit score, www.annualcreditreport.com is the official website for your free annual credit reports from Experian, Equifax, and TransUnion. Visit this website to confirm that the debts associated with you belong to you and that you have not been the victim of fraud.
Now let’s take a deep breath and get to work! Make a list of your credit card debt using these headers: credit card company, year card opened, outstanding balance, minimum payment amount, interest rate, due date, limit available credit and total credit limit.
If you’re paying more than the minimum on any of your debts, write it down, but consider taking a break until you decide to deploy one of the debt management strategies. Once you have written down this information, choose how you want to be SAD:
snowball strategy. The snowball strategy is to identify the smallest outstanding debt, regardless of interest rate, and pay it off first. Then, once that debt is paid off, you take the amount of money that you applied to that first debt and apply it to the next smaller outstanding debt.
Avalanche strategy.The avalanche strategy involves identifying the debt with the highest interest rate and paying it off first. Then, once that debt is paid off, you take the amount of money that you applied to that first debt and apply it to the debt with the second highest interest rate.
Debt consolidation strategy.The debt consolidation strategy can be used alongside the snowball or avalanche strategy. Total your outstanding debts. Find a credit card you currently own with no outstanding balance. What is your credit limit on this card? A rule of thumb is not to owe more than 30% of your credit limit on any one card. However, if you find a card that covers the full amount of your debt and you’re sure you’ll pay off that amount within a specific time frame, call that credit card company and ask if they have a balance transfer offer available. Make sure the offer is zero percent interest. You may be charged a one-time transfer fee. Factor the cost of these transfer fees into your strategy. Next, take the balance transfer amount required and divide it by the number of months of the balance transfer offer, minus one.
Can you make these payments and meet your living expenses obligations (i.e. cost of rent or mortgage, car payment, food, fuel, etc.)? Ideally, you can consolidate your debt using a zero-rate balance transfer offer with a credit card that won’t be used for purchases, or you can take out a personal loan. Use the same idea with the personal loan: borrow only what you think you can repay.
As you pay down and repay your debt, you may consider closing your credit card(s), but please reconsider. Consider how you can use your credit cards more responsibly. For example, use a card to pay for subscription services like Netflix or Amazon. Set up this credit card for automatic drafting of full payment and ensure that you have this amount in your checking account so that when the time comes to deduct the payment, your checking account remains in good standing. This way, you’ll develop a positive habit around your credit card and set yourself up for success by paying in full each month.
If you are having difficulty with debt management, try one or more of these debt management strategies. SAD is a memorable acronym. Debt may seem like an inconvenience, but debt can also give you the opportunity to demonstrate that you have free will. De-stress and rejoice as you learn more about debt management.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, a member of the Advisory Services Network, LLC, where she offers financial planning and investment management services for a one-time or ongoing cost. For more information about Wendolyn’s financial services practice, please visit its website at www.wtf-asn.com.
The Certified Financial Planner Board of Standards Inc. owns the CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame) certification marks in the United States, which it awards to individuals who successfully complete the initial and ongoing certification requirements of the CFP Board.
This material is provided free of charge and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information relating to your situation.