When I was a college student in the late 90s, I worked part-time at a women’s clothing store in the mall. Back then, many college students worked in the mall, and the pressure was on to not only sell merchandise but to ask people to apply for credit cards. Do you remember those days of either being asked by a sales associate whether you, as a shopper, would “like to save ten percent today when you apply for the [insert name of store here] credit card?” Or, as a part-time retail employee, getting the ask from another part-time employee at another mall retail store: “help me meet my credit card quota and apply for a credit card?”
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 changed how, whether, and when people are asked to apply for a credit card, but back in the late 90s, credit cards were popular. As a full-time college student working three part-time jobs and learning how to manage my financial situation, I had over a dozen credit cards. Most of those credit cards were unused (and on my credit report nonetheless), but the ones with balances were another story altogether. At one point, I felt overwhelmed. How did I get into this mess? How could I fix it? I took the time to read about debt management strategies and chose one that worked for me.
Following are three approaches to debt management spelled out with the acronym SAD for Snowball, Avalanche, and Debt (Consolidation).
Before we delve into the debt management strategies, let’s cover where to find information about your debt. While many banks and credit card companies offer information about your credit score, www.annualcreditreport.comis the official website for your no-cost annual credit reports from Experian, Equifax, and TransUnion. Visit that website to confirm that the debts associated with you are yours and you have not been a victim of fraud.
Now, let’s take a deep breath and get to work! Make a list of your credit card debts using these headers: credit card company, year the card was opened, outstanding balance, minimum payment amount, interest rate, due date, available credit limit, and total credit limit.
If you are paying more than the minimum on any of your debts, make a note of it but consider pausing until you decide to deploy one of the debt management strategies. Once you’ve written out this information, choose how you want to be SAD:
Snowball strategy. The snowball strategy involves identifying the smallest outstanding debt, regardless of interest rate, and paying it off first. Then, once that debt is paid off, you take the amount of money you were applying to that first debt and apply it to the next smallest outstanding debt.
Avalanche strategy.The avalanche strategy involves identifying the debt with the highest interest rate and paying it off first. Then, once that debt is paid off, you take the amount of money you were applying to that first debt and apply it to the debt with the second highest interest rate.
Debt consolidation strategy.The debt consolidation strategy may be used alongside the snowball or avalanche strategy. Total up your outstanding debts. Look for a credit card you currently own with no outstanding balance. What is your credit limit on that card? A rule of thumb is to not owe more than 30% of your credit limit on any one card. However, if you find one card that covers the total amount of your debt and you feel confident that you will pay off that amount in a specific period, call that credit card company and ask whether they have a balance transfer offer available. Make sure that the offer is for zero percent interest. You may be charged a one-time transfer fee. Factor the cost of that transfer fee into your strategy. Then, take the amount of the balance transfer required and divide it by the number of months of the balance transfer offer, minus one.
Can you make those payments and meet the obligations of your living expenses (i.e., cost of rent or mortgage, car payment, food, fuel, etc.)? Ideally, you may consolidate your debt using a zero-interest balance transfer offer with a credit card that will not be used for making purchases or you may take out a personal loan. Use the same idea with the personal loan: only borrow what you feel you will be able to pay off.
As you pay off and pay down your debt, you may entertain the possibility of closing your credit card(s) but please reconsider. Think of how you may use your credit cards more responsibly. For example, use one card for the purpose of paying for subscription services like Netflix or Amazon. Set that credit card up for auto draft of payment in full and make sure that you have that amount in your checking account so when it comes time for the payment to be deducted, your checking account remains in good standing. In this way, you’ll build a positive habit around your credit card and set yourself up for success by paying in-full every month.
If you’re struggling with debt management, try one or a combination of these debt management strategies. SAD is a memorable acronym. Debt may seem like a downer, but debt may also give you an opportunity to demonstrate that you have agency. Destress and delight by learning more about debt management.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC, where she offers financial planning and investment management services for either a one-time or on-going cost. For more information about Wendolyn’s financial services practice, please visit her website at www.wtf-asn.com.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
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