Need to pay off debt fast? Prepare to make sacrifices
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I have a $12,000
debt that I need to pay off in the shortest possible time. What are your
suggestions? My salary is $5,200 a month, and I have a car loan for $1,700 and an
outstanding credit card balance of $6,000. Please help. -- Jangle
You don't explain what the hurry is,
but I hope someone isn't coming after you for the cash in any sort of menacing
Whatever is going on, it's evident that
you want that $12,000 loan paid off, pronto. I would like you to do that, too,
especially if you're in any kind of danger. Thankfully, you have a healthy
income from which to pull. (I'll assume you're quoting a net, rather than a
gross, figure.) Unlike a lot of people these days, you appear to have a steady
job. Be grateful.
So here is the super speedy primary-debt-repayment
plan you requested:
Your first step is to not discount the
importance of your other two accounts. You can't let them go delinquent during
the time you're concentrating hard on the big debt. Therefore, I estimated $150
for the credit card balance and $400 for the car note, making the combination
of those minimums somewhere around $550. Subtract that total from your income
and you have $4,650 to pay down that $12,000 on a monthly basis.
Because you don't specify what your
living costs are, I'll have to do a bit of extrapolation. And, in my world,
your essential expenses add up to $2,450, which would leave you with $2,200 to
go toward the remaining debt. Presuming the interest rate on that loan is
around 30 percent -- I'm shooting high, since perhaps that's your true motivation
for wanting to eliminate it quickly -- you'd be able to kiss it goodbye in just
about six months. Does that sound reasonable? It does to me, but I'm not in
Now, getting back to what I said about
essential expenses, that's where you have to take action. Eliminate all
extraneous spending so you can have the maximum sum be made available for your
goal of quick debt repayment. Can you live on my proposed $2,450 for half a
year? Only you know the answer, Jangle. To find out, list and review every line
item in your budget and start slashing until you have at least that amount left
In the event that cutting down to this
or any extent is simply not possible, don't panic. You have three other
- Sell some stuff so you can reduce the debt. Where? Online
auctions and listing services, pawnshops, yard sales. Heck, even ask your
friends if they want to buy any spare items. Each dollar you eliminate from the
balance will help.
- Bring in more money so you can increase the payment. Maybe
you can work at the mall on the weekends, tutor a child in math or walk some
dogs. Explore all possibilities.
- Lengthen your payoff time. Maybe six months just isn't
possible. If this is the case, communicate that fact with the person or
institution to whom you owe the money. See what kind of reasonable time frame
you can work out together.
Something to consider, too, is that
your car will be paid in full in about five months. Once that payment is gone,
you'll be able to apply the extra funds to the loan in question. And after
you've satisfied both of those obligations, you can increase the amount you
send to your credit card company.
And then it won't take long before
you're entirely in the beautiful black -- never again to return to the
scary red. Right?
See related: 8 steps to reducing credit card debt, Your first budget in three easy steps
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: October 27, 2010