Reduce Debt Increase Wealth

Pay off credit card debt?

June 06, 2021 MisterChuck Season 2 Episode 64
Reduce Debt Increase Wealth
Pay off credit card debt?
Show Notes Transcript

Mister Chuck helps a friend pay down and then pay off all their credit cards debt. How to get started, what to do every month and the important thing to stay focus on getting all the debt paid off.

Article Links:

https://www.creditcardinsider.com/learn/reducing-debt/ By Brendan Harkness

Charles McDonald:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant, turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom takes commitment, confidence determination, how to pay off credit card debt, we'll get started in one moment. Together, we're going to explore our finances and figure out how to improve them. reduce debt increase wealth is a podcast to inform those to improve personal finances, whether it's eliminating debt or making smart investments, how to pay off credit card debt. The other day, I met up with a group of friends that I hadn't seen or even talked to in a very long time. And as we were going around the tables, sipping on our beers, asking each other how things are going in real life and what you've been up to. When it came around the me They asked me how things are gone. And my response was, it's everything's going great. I was able to pay off all my debt $133,000, I saved $31,000 in interest. And the best part is it only took me three years and eight months, once I got serious about getting it done. And that we're all happy for me. And the night went on. But when I was getting ready to leave a little, you know, a few hours later, one of the gentlemen came up to me and said, here's my phone number, what day are you off work, you be able to talk it because I want you to explain to me how you paid off your debt. And I said, I'll do better than that. I won't explain to you how I paid off my debt. I will teach you how to pay off your debt. And everybody is a little bit different. And everybody's scenario is a little bit different. And he said, Great, I really am serious, because I've got some serious debt problems. And my credit score is not very good. I say well, we can get that debt under control, and your credit score will improve. So a few days later, when I was off work, I called him I answered the phone he was you know, available, like he said he was I said, What is your problem? What kind of debt do you have? And I heard he told me he had four credit cards, they he was carrying a balance. Plus he had an automobile loan that he'd got about a year ago, and still owed $55,000 on it has credit score was no good. I asked him if he had a savings account. He said, Well, I got a savings account. I got probably $50 in there. I said Why do you want to get this debt under control? What's your long term goal is well, I'm renting an apartment right now. Because a couple years ago, I got divorced. I but I don't have any child support. I don't have any alimony. And all that is taken care of. So I'm trying to get restarted in my life. And his rent was around 15 $100 a month, plus utilities and everything else. I said, Well, we need to get together I want to meet with you. And this is a list of things we you need to do. Before I show up, found out where he lived got his address, we set up a time and a date. And I said great. Now this is what you need to do. Fine, all your most current credit card statements for all your credit cards, get your loan agreement out for a year, automobiles loan and get on top of that. I want you to compile or get a list of everything you pay every month and put it together. So we have an idea what we're working for. And we need to know when you get paid how often you get pay and what's your take home pay. He said well that'll be easy. That shouldn't take me more than five minutes. I said well good. Get it together. So I went there about a week later one and sat down at his kitchen table, pulled out his laptop and we started working on it. His credit cards He had four credit cards, one had a$3,500 balance, another one had a $2,300 balance, another one had a $5,500 balance. And the final one had a $4,500 balance. So he owed a total of $15,800. And they all had 17% to 21% rate of interest. auto loan, he was about a little more than a year into it 13,14 months. He had a nice car, I'll give him that. And nice cars generally are expensive. And I asked them, did you have problem getting a loan? Yeah, I had a little bit of a problem. I bought this car brand new. And I had a get a interest rate of about 6%. I got Well, that's a high rate of interest. Couldn't you get a loan through the dealer? You know, the manufacturer? Didn't they offer any incentives? No, no, his credit score was too bad. Either was it doesn't seem too bad. What you've told me? Do you pay all your bills on time by the due date? His response was he didn't know. His response was I do pay him every month, whether it's on the due date or not, I'm not sure I go, we need to look into that. So we're it's all Where's your list of everything that you pay every month? Well, his rent, and then he had some utilities, he didn't have any utility. But basically what he did was went online to his checking account, and looked up everything that he paid and wrote it down, which is a start. But he didn't know when any of these bills were really do either. Well, first thing we need to do, even though you have a savings account was $50 or $100. in there, that's not doing you any good. The first thing we need to do is quit creating new debt, quit using those credit cards. Don't purchase everything with a credit card, we want to suspend all your credit cards, and we're not canceling them, we just want to quit using them. The next thing you need to do is start making only the minimum payment on all your credit cards, the minimum payment. And I'll explain to those why we're gonna do that. Third thing we need to do is set you up a budget. Now the budget is not going to restrict on what you're buying or paying for. It's just a matter of looking at your finances. And knowing how much your income is coming and your net pay. And how much of its going out on all your monthly expenses, including the minimum payment on all your credit cards. And on your auto loan. He said Well, I've been trying to pay off my credit card. So I've been paying extra. I go Yeah, you've been paying extra, but you still use them, you keep charging. And the overall effect is you're charging more than what you're paying. So the balance is going up every month, I could see that over the last three months because he had his statements there. I guess this one had an average balance of 2,000 then it went to 2,100 now it's 2,300 your balance is growing and that was the case on all four of his credit cards. So we make the minimum payment and then whatever money you don't use to pay those monthly bills, you're going to deposit that into your savings account. And their first one of your goals is to get that savings account up to a minimum of $1,000 and you need $1,000 because it'd be a an emergency fund is something would happen if an expense would pop up. Whether you need an A new tire because you ran over something you need a new tire you can take the money out your emergency fund and pay for the new tire because we're not no longer gonna use credit cards. He said okay fine. already went through made list of his monthly expenses you know his utilities gas electric is telephone or cell phone is entertainment is internet services, TV subscriptions cable. His streaming services is everything he did, how often he go out to eat. He said about every day, do you go to the grocery store? Do you know how to cook? Oh, yeah, I'm a good cook. And on and on, we went. And I tried to determine we want actually had to go online to the utility bills and his telephone bills and find out the due date and record all that down. And we got all that compiled. And I started looking at it. And I said, well, the due date for yourself phone is the seventh of the month, and you've been paying it on the 15th, you've been paying it late every month. And that was the case almost every one of his bills, he just paid it whenever and would forget about it. He didn't keep track of nothing. First thing you got to do is start paying everything on time. Well, the first thing, the next first thing, you got to pay all your bills on time when they're due. And you can set that up online, through your bank with an automatic payment. So that that gets paid on the day, it's due, you got plenty of income here. There is no reason why you are having all these problems. So let's get paying everything on time. Your rent is due on the first of the month, they give you a grace period until the fifth, I want you to start paying it on the first of the month. It just got to get in the habit of paying for everything. When it's due, no exceptions. He said fine. So we got all that set up for him. Got his savings account. And he said, Well, how do I know how much money I got leftover? I guess this is the important part. You look for the reason why we want to know when everything is due and how much is due. Because we want to look forward at least one to two weeks. Looking forward in time. What's gone. How much money am I going to have on this paycheck? What do I have to pay between now and the next paycheck? thing give yourself a slight budget for food, groceries, quit going out to eat every night, eat at home, go out to eat maybe once a week, and it'll be a lot cheaper. You can buy food prepared food at the grocery store is still gonna be cheaper than going out to a restaurant and eat a home. You got a nice kitchen here. He got everything you need. Why aren't you using it, though? Okay, I'll do it. So he did. I called him. Yeah, it was about two three hours working on this. Got them all set up. I called him a week later asked him how he allowed trouble. I'm still a charge a few things on a credit. I go Why did you charge on your credit card? I told you not to? Well, I need it. I want it to have this or that tool. And it's easier just to charge it on the credit cards, because I bought it online. I What did you use your debit card? Why don't you use it? You know, with the money out here? Why didn't have enough well, then you shouldn't buy it. If you didn't have enough money, it's something you don't actually need to absolutely have. Just because you want it you don't buy it. So we started working on his spending habits. You got to identify that you have a spending problem. Once you identify your spending problems and work on eliminating them, then you can start moving forward. was doing his budgeting. I noticed he was paying for cable TV. It was like $120 a month he had three or four streaming channels that was costing him 30 $40 a month I don't know but it was it was adding up. I told him he needed to get either cable bill only get away with all your streaming or stream two items. Do away with the cable and do away with all these other streaming services. What do you watch on a regular basis? Well, I just watch this one here and happen to be streamed. I goes Why do you have all that other stuff cancel it. The phone your cell phone service? Why is it so high, reduce it down? unlimited talk, unlimited text, and then data only get what you actually gonna use try hooking up to a Wi Fi when you're out. Then use your Wi Fi and quit streaming so much data on your end in this reduce your phone bill and worked on some of these items for him. Also, why is your electric bills? Well, it's hot outside and I set my thermostat on 65 degrees, why so cold, that thing is running non stop when it's 85 degrees out, you need to have your thermostat set higher, you're just throwing money away. So we worked on that. So about a month later, I checked up with him and he was really happy. He said, I got my savings account, I have $3,000 in there, I really saved up a lot of money. I mean, the home more, I got a rid of the my ex my cable bill and couple my streaming bills. I read did my phone cell phone, so I'm paying about $40 less a month. And he was really happy. He's as he goes, this was his common sense stuff, it really didn't take a look I know is this you got to identify where your money is going. And then you got to prioritize what you actually need. rent, utilities, the basics, food and clothing. And then after that, you need to reduce what you want. Because you cannot have everything you want, because you got to pay for it. And when you put it on a credit card, he pay for more than one time because the interest rate is so high, I say you're doing really good. Your savings account is it's growing pretty quick, I didn't really expect that. Lee $1,000 in there, you said you had a total of 3500, leave 1000 in there, it's 20 $500. Pay off that credit card to had the 20 $300 balance and then apply the rest to the highest interest rate credit card. First. He said, Well, the 2300 is my lowest rate. Why would I pay that off, because we want to get it to zero, because later I'm going to tell you a secret. So he paid off the 2300 was under 2300. By now because he made a minimum payment. He applied the extra money he had about two or 300 to his highest credit card rate next month, you do exactly the same thing. Put your excess money that you're not gonna have spent looking forward for two weeks on paper to paper, put that aside and your savings account? Do you have any bills coming up that you had to pay like car insurance that you pay maybe every six months? or rent insurance you pay maybe once a year? Well, yes, about three months from now I'm going to have some car insurance do okay. And remember that that's common do put that in your list to look forward to it because you don't want to take that money out of your checking account when you're going to have to pay that bill. So keep track of that. Keep track of everything you pay either quarterly, semi annual, or annually. So that you don't forget about those items. And that's part of your budget. And remember, your budget is set by you. I'm not setting it. It's you to control your spending to help you control your spending. Are you doing any excess? Spending? Have you use your credit cards? No, I've been pretty good. It's been tough. I go just get in the habit of doing that. And it'll be easier over time. Anyone know why I had him pay off the credit card to handle lowest interest rate. I said because you just wait and keep an eye on your mailbox. or online. If you go online to that credit card company, they're gonna give you an offer. And that offer is gonna be you can transfer money, do a transfer from another credit card to that credit card, pay 3% of the mounds that you transfer and have zero rate of interest, either for 12 months or 18 months, you got to wait to see what they offer you. And when they do that, you got to pay apply as much as you can, that you can know that you'll have that two zero balance again, and that time period so that you have gotten reducing what you pay in interest. It's very simple. So keep track of that. He's gonna go, okay, he looked. So about a month later, we're in like the third or fourth month now he's doing really good because he has a decent income. He's been paying everything on time. I said, Have you checked your credit score lately? No, I got a lot of the banks are your one your credit cards, my offer that. And his credit score was like 450 500 range. So he checked it, and it was like, almost 600 I goes, your credit score is starting to go up because you got a credit card with no balance. Don't ever cancel these, when you pay them off, you got to keep those open, because that's a line of guts credit. And if you read, cancel them, you're going to reduce your credit. And if you reduce your credit limit, you're gonna have a bad credit score, because they're gonna think you got a big balance on everything. And he had another Ekster if you want to call it extra couple $1,000. And I said, Go ahead. You have any bills coming up? Where you might need that money? No, you Okay, you you I know. You told me that you got car insurance coming up? When is that? Well, that's next month when how much is that car insurance? He told me it wasn't too bad. I said you have that amount of money, and a month from now? Oh, no problem. I said, Okay, go ahead and apply it and play down that your highest card, and we'll see how we're doing. And he did. And he got two cards paid off. Now. I said, Well, you're doing really good, you got two more cards to go, your credit score is going up. And that definitely is going to help your credit score. So let's stay at it. Keep at it, look at your budget, look at the things that you list it is there anything on that list? That you can get reduced down somehow by calling the provider and ask them if there's a different plan you can get on or a payment plan or a budget or something where you can have an equal amount of payment, like your electric bill, can you get on a budget when that see how much that would be and pay the same amount, instead of having three or $400 a month, one month or two or three months and then paying $100? Maybe they'll put you on the budget and you have a nice steady $200 a month electric bill. And then we can plan for that a lot easier. So you Okay, I'll look into that. And he did. So he did pretty good. So we're moving along. And about a year later, he had all his credit cards paid off. And he said, Well, I'm willing to do it because my loan car loan is down to about 38,000 range. He goes, I want to take money out of my 401k and pay off the car so that my credit score will go up so that I can buy a new car, buy a home and quit paying his rent. I said no, never take money out of any retirement account. To pay off debt. I go have you still been making contributions all Yes, I go. Don't reduce your contributions either. If the company is doing a match, you got to maximize your amount that you're putting in there to get the total amount of the max, that is a benefit they're giving you. And there'll be more than happy not to pay it to you if you reduce what you make and contribution. So that is a bad move. Keep doing the same thing you've been doing with the credit cards. It's build up your emergency fund now. And let's get it up to $2,000 and leave it there. We're going to increase that mergency fund over time, because sooner or later, we want to be three months to six months worth of the expenses that you are paying month to month, or could be six months of your income, whichever is easier to figure out or whichever is the higher amount. I know that that interest that's being paid on your savings account is really low. But let's get it up to 2000 and leave it there. Here's where I got like 6000 then they're good. Take out 4000 and again, I asked him Do you have any bills coming up that you pay quarterly that might surprise you? No, I go you're positive Okay, let's leave 3000 in there, pay 3000, apply it to your auto loan. Now remember that when you do that is not going to change your monthly payment, you're just reducing your principal balance, and you're just knocking off the number of time that you would be paying on that loan. So let's apply 3000 is Li 3000 in there, get that other loan and start doing the same thing you did with your credit cards. Keep your budget intact, keep your spending on or controlling as well. I don't really have that urge to spend like I used to, here's I don't buy things I really don't lead, I guess you ask yourself, before you buy it, do I really need this? I never needed it in the past. Why do I need it now. And that's what he's been doing. And he's got his spending under control. He's got his savings account built up his mergency fund build up, and he's got his credit cards paid off. And he's getting his loan on his car loan paid down. I then ask game you still looking to buy a new home? Not necessarily a new home, just buy a home? He said yes. He goes, I like to get it done in the next couple years. I go we can accelerate that. If you want. How much do you owe on your automobile? And how much can you sell that automobile? First, do you owe more than what you could sell it for? You need to go to Kelley Blue Book, look up the average retail, look up the average wholesale. And if you can sell that car for more than what you owe on it, and pay off your loan, have a little bit extra couple 1000, he can go out and buy a good used car, maybe get a four or $5,000 loan on it and get it paid off in a year. And your payment is gonna be a lot smaller than on the current car you have. I know you like your cars. But if you do that, we can then put more money in your savings, build up your downpayment for your home, have a larger emergency fund, and get yourself in that home quicker and have a much improved credit score. He says I'll look into it. And he did. I called him like a month later, he called me about a month later and said I sold my car, I paid off my loan, I got an extra $4,000 I was able to buy a good used car for $6,000 I use money my emergency fund and I didn't finance it. I said Well, you're doing good you're learning. Now you need to get that emergency fund built back up and get that money back in there he goes, I will because I got all his extra money now, because I have no debt. I said you know what you just done. He goes what you have reached your friend natural freedom, you now are financially free to do whatever you want to make what ever decisions and not have to think about how much it's gonna cost you stay on your budget, keep everything under control, keep your spending in check, put money into that savings account. When you have $5,000 then you need to go online and look up high yield savings, pick up bank and transfer anything you have in your savings account over $5,000 and put it into that high yield savings. So you earn more interest is not going to be a whole lot different, there's gonna be a lot more than what your current bank is paying you. And instead of getting 23 cents to $1 a quarter, you're gonna get four or $5 a quarter to start out with two or $3,000 in there. So it's gonna add up fast and the more money you can put in there, and the faster you can put in there and get yourself a good down payment list shoot for at least 15 to 20% down on the price range of the home you're looking for. You need to figure out how much you're willing to pay. You're paying 15 $100 a month in rent. So your payment could be that, but also look at about 35% of your gross pay is what you can afford on your mortgage. Try to keep it under 35% and give you more money every month to live life like you want to live. Be back in one moment was my final thoughts. If you listen to this podcast using an apple podcast app, please rate and review this podcast for all your non Apple users. You can download iTunes on a Windows machine and go to the upper left hand corner, select podcast, do a search, reduce debt, increase wealth, you can then great and reviewed the podcast and also follow the podcast. I appreciate any feedback that I may get. How do you pay off your credit card debt, quit creating new debt, identify your spending habits, set up a budget, identify where your money is going. Reduce the money that you're paying out to things that you really don't need are no longer using. Get the best available plans for things you're paying for. Increase your savings, credit in your emergency fund to help you when something comes up to help you eliminate using those credit cards that you have trouble paying off. You do all these things. Keep everything under control, and you will be out of debt before you know it. And why stop just paying off credit cards. I say go ahead and pay off all your debt and achieve your financial freedom. Freedom from paying the mortgage and the banks and all those loan companies and keep your money and invest your money for the long term. continue paying into your retirement account. No matter what anybody else tells you retire retirement is the only thing you cannot finance. So you got to have your money and don't rely on how much you may be given from any pension or social security.