Saturday, March 04, 2006

Our Credit Card Debt Story

Debt Hater recently asked me how I paid down my credit card debt so quickly. First let me correct what I stated in that post about how much debt got paid off when. At the end of 2004 we had over $11,000 in credit card debt...most of it had been aquired in the preceding 3 months. By March I had it paid off, but I added $3000 in order to fund a Roth. This took another 3 months or so to pay off (at a very low promotional interest rate) so the net effect was paying off $14,000 *total* in about six months.

Clearly that's not typical and I am no saving superhuman so let me explain the circumstances that led to the quick debt paydown and payoff.

Backstory
I won't blather on about the two preceding "lean" years that led up to 2004 but let's just say that we were used to carrying credit card debt. We always had some lurking around. For example, the year I was unemployed and LaLa was a shuttle van driver (here is her illustration of what she had to wear that winter) we methodically paid off an $8000 credit card bill (the roof was leaking...what could we do?) only to realize we'd gone about $8000 in debt on other cards in the meantime. Sigh. I landed a well paying job at the tail end of 2003 and 2004 was mostly spent reducing our credit card debt and apparently buying all the stuff we couldn't afford for a while. We were about a month or two away from paying off our final $1500 credit card balance in the summer when we reversed directions.

Debt Spiral
We did purchase some things we truly needed and several things that while pricey I do not regret buying...but clearly spending was out of hand for a few months (mattress, iMac, Christmas presents...and on). To this day I'm not sure what caused the perfect storm, but maybe someday I'll go Quicken-diving and figure it out. So, December 2004 and credit card balances totaling over $11k ... and no savings other than retirement.

Bonus
While I didn't get the large cash bonus I had somehow convinced myself was coming at the end of the year...I did still net about $4,000 (after taxes etc) as a bonus and within a week or so I put it towards the credit cards. All of it. We really curtailed credit card spending so we wouldn't be spending what we were paying down elsewhere.

Tax Refund
I did my taxes in late February expecting a modest refund. When done, I realized I was due a refund of over $6000. While I was thrilled to have that sort of windfall coming our way at a time we were so committed to paying down debt...I was beyond irritated with myself for loaning Uncle Sam $500 a month. I had neglected to adjust my W-4 in January 2004 after aggressively paying taxes in Q4 of 2003 to help pay off unemployment income tax I had not had deducted. As soon as I received my refund in March I put it all toward the remaining credit card debt. And I promptly fixed my paycheck so I had $500 extra each month to assist my savings goals.

The Last $3000
With our credit card debt all but payed off in March I was loathe to take on more debt, but I saw an opportunity to fund a 2004 Roth with $3000 borrowed at 1.9% using a promotional offer before the April 15th deadline. We paid our daily use card off every month at this point and I would pay down the $3000 with a large portion of my 2nd paycheck each month. Even so this amount took longer to pay off than I had originally intended because we had some work done on the house (and I still had no savings!)

Debt into Savings
Those large unexpected windfalls allowed me to pay down my existing credit card debt very quickly. You might think that was lucky, but if we hadn't truly committed to paying it off we probably would have spent that $10k on pimping LaLa's '78 pickup or some other dumb thing. We had slowed the more radical spending in the beginning of the year but had not changed our monthly spending drastically.

But when my net takehome was cut by $800 a month starting in July we had even less to spend each month because we were now...wait for it....SAVING! I was putting at least $500 a month into my 2005 Roth IRA to try to meet the maximum by the 4/2006 deadline. And we were trying to start an emergency fund of 3 months expenses in a liquid account. So we really did have to try to cut spending so we could continue to pay off our credit card balance each month AND continue to make our savings goals.

Even though my story probably looks like I had it easy because I was able to pay it all off in a very short time, I think the principles are the same:
  1. Stop Digging a Cash Hole -- do whatever you need to do to stop taking on more debt. Don't use your cards, stop buying stuff you can't afford...whatever! You can't hit a moving target and you'll need to know the total of what you need to pay down.
  2. Make a Plan -- use the debt snowball, RDRP, baby steps...whatever works for you, just make a plan and start doing it.
  3. Use Windfalls to Pay Faster -- tax refunds, found money, sign-up bonuses, part-time income...use any unexpected inflows to pay off the debt even faster. You don't even miss it.
  4. When the Debt is Gone -- save, save, save and have a fine time doing it too.

At least that's what I think. And of course I'm no expert :)
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14 comments:

  1. It's nice to hear the how when someone has achieved a major accomplishment. It's very inspirational and shows people that they really can do it too.

    I recently did a post on how I saved $10,000 in my emergency fund. Thanks for sharing your story.

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  2. Not sure if you've submitted this to the Carnival of Debt Reduction for this week, but I'll ask Jim to include it. This is a FANTASTIC post!

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  3. Good stuff! I don't see any luck, I see determination.

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  4. Love the illustration! She could survive a Wisconsin winter without a doubt!

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  5. great story! You just inspired me to go to http://www.mdmproofing.com/iym/excel.shtml and download the debt snowball spreadsheet. Setting up the snowball on the minimums we can do "in our new financial circumstances"... we can still be debt free except for the house in 2 years. SWEET! And we can have the house paid off in 15. SUPER SWEET!

    thanks for the inspiration.

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  6. You don;t give yourselves enough credit. At my previous employment, I delat with families that were leaving in homeless shelters and when they got their income tax refund-they blew it. I have seen people that have NOTHING receive a large lump sum settlement and they BLOW IT! What you guys did took discipline! You guys were focused enough on your goal to become debt free that you CHOSE NOT TO PIMP THAT CAR!!!
    I give you "props". I commend you on a job very weel done!!!

    Thanks for sharing.

    Getting Out Of Debt
    I did this because the link below will bring you to my blog about life with my 7 kids and dealing with autism....

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  7. Thanks for this post!
    Reading it I feel much better because I am doing many of the things you described. It's nice to be in good company!
    I just got my state tax return last night. I deposited the check and sent a payment to completely pay off one of my credit cards this morning! With discipline and smart tax filing I might be able to beat my current debt free goal. Thank you again!

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  8. You are a wise credit card owner, really. Besides I guess your advices can help many people here. I would like to remind you, do not forget about cash back credit cards once you prefer to get bonuses.

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  9. Very inspirational story, you really took the bull by the horns and did what you had to do. Many people should look at all of the various options of how to
    reduce card debt faster.

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  10. Good post, really. But you should learn about credit card management too much, if you want to avoid running into debt. Everybody who knows all the credit card disadvantages will think twice before applies for a plastic.

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  11. he was no saving superhuman so let me explain the circumstances that led to the quick debt paydown and payoff.....
    Backstory is very interesting..
    Thankyou..

    =====
    helen

    Don't be a victim. Stop credit card debt now. We can help.

    http://www.stop-credit-card-debt.com

    ReplyDelete
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    ReplyDelete
  13. That's a great story! Keep up the good work!
    Credit Help

    ReplyDelete
  14. Well what you call luck i would call "strong will" and guts. I will facebook this article and show other people how they can turn the situation. Cheers.

    Alex from,
    credit card machine

    ReplyDelete

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