No matter what anyone tells you, interest costs are not your friend. In fact, interest is your enemy – it is not benign. Every dollar you pay towards interest is a dollar you can’t use to build your financial foundation. And every hour you work to pay your interest costs is an hour you spent working for someone else. Get mad at those interest costs. Then, do everything in your power to slay your credit cost monsters.
How do you do that? The best way I’ve found is to use the following 7 step approach:
If you really want to cut your interest costs in a meaningful way, you have to be all in. That goes for everyone in your household too. This step is crucial because reducing your interest costs sometimes requires lifestyle changes and a different focus. You need everyone to row in the same direction if you want to get to shore.
Have a family pow wow and discuss what you are going to do, why you are going to do it and how. Then, ask everyone to sign on. Don’t go on to step 2 until your entire clan is on board.
The key to success in any great struggle is proper intel. Many people who carry credit debt don’t know the interest rate they are paying. Of course the credit card and mortgage companies love this – but it’s a fatal error for you. List all your debts, the interest rate you are charged, balance due and minimum monthly payment. Also include the actual payments you make on each card and then total that number on the bottom of the list.
Tap Into Your Tribe
You may think otherwise, but it’s highly likely that your family and friends would be willing to help you if you approach them the right way.
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Go to the people in your circle and ask if they’d like to earn 5% on their money by refinancing your debt. This is a win-win because they get to help someone they care about (and earn more than the bank is paying) and you take a huge chunk out of your interest costs.
Just make sure that you have a solid debt repayment plan written down before you talk to your folk. This way you have something to present to them. It also demonstrates that you are serious about repaying the money you borrow from the people you care most about.
This is an old technique many people are aware of but fail to utilize to the fullest. Unless your credit is completely shot, you should be able to move your current balance to another credit card company. When you do this, they usually offer a reduced rate for a honeymoon period. Take advantage of this as much as possible but be smart about it as well.
If you open up lots of new lines of credit over a short period of time, it’s going to ding your credit score. By all means, roll your balance to new credit card companies if you can but take advantage of it by using those lower rates to apply more money towards the balance due. I’ll explain more about this in step 6.
Bring In The Pros
After you’ve tapped into your people, try arranging a loan using a peer-to-peer lender. These are companies that match up people who need money (you) with people who have money to loan out. You probably won’t get rates as low as you could if Uncle Tim lent you the dough. But if your credit standing is solid, you could drive your rates below 7% – or even lower.
Many people report savings of up to 30% on interest costs so this could be a worthwhile step if for no other reason than to learn about your alternatives.
Be Smart About How You Make Your Payments
At this point, you’ve refinanced your debts to the lowest possible finance cost. That’s great but we’re not done. Our goal is to reduce your interest costs by 75% (or more) and we’re not going to stop until we succeed.
Update the list you made (step 2 above) and sort it in order of highest to lowest interest rate. Your next step is to throw as much money as you can towards the highest cost debt while making minimum payments on everything else. This way, we’ll retire the most expensive debt quickly and free up more capital to pay down the next-highest debt fast. Let’s use an example.
Let’s say that you made a list of all your debts and calculated that your total debt payments are $1500 a month. For the time being, let’s assume that you are a renter so you have no mortgage. Make the minimum payments on all but your highest-cost debt. Let’s assume that comes out to be $500 a month. Take the $1000 that’s left over and use it to pay down your most expensive cost loan. Once you get rid of that loan, do the same thing with your next-highest cost debt. So if we assume that the minimum monthly payments for the rest of your loans is now $400, make those payments and use the $1100 you have left over to pay the next highest cost debt.
This approach is what’s known as the “snowball” approach because it quickly grows the amount you use to pay down principal with the amount you save on reduced interest.
Of course, if you want to accelerate this process you can do so by cutting your spending, getting a part-time gig or both. This will free up even more cash you can then use to pay off your highest cost loans and get completely out of debt even faster.
Credit Score Savvy
Creditors determine what interest rate to charge you based on your credit score. That means it’s crucial to keep your number as high as can be. If you have some old credit blemishes, try to repair those items which drag your score down. You might be surprised to learn this but it’s not as difficult as you might think.
Once you maximize your credit rating, contact your existing creditors and ask them to reduce the rate they charge you based on your new improved score – and don’t take no for an answer.
Debt cost is a problem but it isn’t your master. Cut it down to size by refinancing first and then ordering your payments in such a way to apply as much muscle as possible towards paying down your highest-cost debt. Parallel to that, maximize your credit score by cleaning up your history.
My own experience tells me that if you go through all these steps you may be able to cut your credit costs by 75% if not more.
Are you in? What additional steps are you going to take?