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Do you have credit card debt? Is it under control or would you say that it’s starting to run away from you, and it’s picking up speed? Then maybe it’s time to start putting together a credit card debt elimination plan. Perhaps you have heard about the Debt Elimination Plan before somewhere else but just weren’t sure how it worked. Well have no fear. In this article, I’d like to describe the Debt Elimination Plan in detail to help you start the path towards leading a life free of credit card debt. There are variations to this process. The one detailed below is taken from Loral Langemeier’s The Millionaire Maker.

Step 1: Create a Debt Elimination Table

Create a table listing all your consumer/credit card debt. If you can do this electronically on a spread sheet, that’s even better. Create 5 columns: 1) Name (of credit card), 2) Amount (amount owed), 3) Minimum Payment, 4) Interest Rate and 5) Factoring Number.

Step 2: Determine the Factoring Number:

To determine the Factoring Number, you will need to do a bit of calculating here. Take the amount owed in column two and divide that number by the number in column 3 (the min. payment). For example, if you owe $5000 on a credit card and the minimum amount due each month is $75, then your Factor number would be 67.

Step 3: Priority Payoff Table

Once you’ve created your Debt Elimination Table with the necessary information in each column, you’ll want to prioritize the list by the Factoring Number. Place the credit card with the lowest Factoring Number at the top of your list, the credit card with the second lowest Factoring Number second and so forth, ending with the credit card with the highest Factoring Number last.

Example:

Step 4: The “Jump-Start Allocation”

This is the tough part. In addition to the minimum payments required, you are going to take an additional $100-$200 from your current spending and add this amount to your debt elimination plan. This amount breaks down to just $3 to $7 dollars a day. If you are willing to give up one latte a day, (or something similar) you can do it. Take a look at where your minor cash spending is going and put this aside instead, and you are on your way!

Step 5: Debt Payments

Take the debt listed in the first row of your priority list and apply the extra $100-$200 “jump-start allocation” money to the minimum payment listed with this debt. For example, if the minimum payment is $50, add the extra $100 for a new monthly payment of $150. Continue to make the minimum payments towards the other credit cards and make the increased payments of $150 towards card #1 on the list until it is paid in full. Once the card in the number one spot is paid off, you will take the amount you paid for card #1 (in this case $150), and add this amount to the debt in the second slot. So now the amount you will be paying towards the second card on your list will be the original minimum payment amount of $50 (from our example above) and the amount from card #1 of $150 for a new total of $200. The payments will continue to build as you drop down the list of debts, and your ability to pay off your debt will accelerate incrementally.

For this plan to work, you must be committed to making the monthly minimum payments and adding your “jump-start allocation” amount. You must be consistent. Furthermore, you must be committed to adding the amount that was going toward the previous card (once it is paid off) to the next card on the list. By the time you get to the last card on the list, you will be amazed at how fast you will be able to pay off that last debt.

There are other ways to prioritize your credit card list. Some plans recommend that you prioritize the cards based on interest rate. However, I have found that by prioritizing the cards based on the above formula, you will see results much faster.

I know that this won’t be easy and that it will take discipline. Let’s be honest here, if we were really disciplined in the first place, credit card debt would not be an issue for us. And of course, we are assuming that we are not adding to the credit card debt from additional consumer spending (at least hopefully not too much). I recommend that you share your plan with someone that can support you on your debt elimination journey. Consider partnering up with someone else who may be in a similar situation so that you can support each other (similar to a workout buddy!). This process does get addicting. As you start to see your balances shrink, you may begin to find other ways to reduce spending just so you can add to the “jump-start allocation” amount. Good luck and I wish you well on your path towards a life free of credit card debt.

A credit card debt elimination calculator is available at: www.liveoutloud.com/calculator. You can input the information above into the calculator to see how long it will take to pay off the credit card debt using this system.

This entry was posted on Thursday, November 1st, 2007 at 9:00 am and is filed under Debt Elimination. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.