There is a very simple calculation that credit companies use to calculate what you can borrow. The trick is in reversing this algorithm so you may use it to your advantage. Note that this method will not, in any way, harm your credit and will actually help it in the long run. These steps will help you get out of debt with only a minimal added amount that you will not even notice.
The steps to get out of debt are as follows.
1) Calculate what you have left over after you month's expenses and put aside 10% of that. It doesn't matter if it's only $10 it will work.
2) Add that 10% to the debt with the lowest balance's minimum payment. Pay the minimum on all other debts.
3) Once the debt with the lowest balance is paid, take the minimum payment, alongside that 10% of what you had left over after expenses, and add it to the next lowest debt's minimum payment.
4) Simply repeat the process of adding the minimum payments and the 10% of what you had left over after expenses to the next lowest debt in line.
Lets see this in action, I will not even calculate progress before it is the next debt's turn to be targeted.Let's assume that after all of your monthly expenditures, you have $100 left over each month. 10% of this is a mere $10. Let's also assume that you have $150,000 in debt. $110,000 for the house, $30,000 for your vehicle, and another $10,000 spread between two credit cards. The first credit card has $4,000 and the other has $6,000.
The minimum payments for the cards will be $40 per $1,000 debt for the sake of argument. I will not calculate interest since I am not calculating progress before the debt is targeted. Your minimum debt payments are as follows:
Debt payment
- Card w/ $4,000 bal $160
- Card w/ $6,000 bal $240
- Vehicle $400
- House $900
Total monthly payments to debt= $1700
Note: The first debt is always the hardest to get rid of, so if you can do more then %10 on this one, it's always better.
First Debt
The minimum payment is $160 for the $4,000 debt. Add the 10% and you are making a payment of $170. With a payment of $170 this debt will be eliminated in 23.5 payments.
Second Debt
Now, here is where the magic happens. The minimum payment of the second lowest debt is $240 with a balance of $6,000. Add the $170 you were paying on the other debt and you are making a payment of $410 without paying anymore then you were while targeting the first debt. With a payment of $410 a month this debt will be eliminated in 14.6 payments.
Third Debt
The third debt is the vehicle. The monthly vehicle payment is $400. Add the previous payment from the last debt, which is $410 to this monthly payment. You are now paying $810 per month to this debt and it will be eliminated in 37 payments.
Fourth Debt
The fourth and final debt is the house. The monthly payment for the mortgage is $900. Add the $810 to the $900 minimum and you are now paying $1710 per month without even paying anymore then you were previously. With a payment of $1710 per month your house will be paid off in 64.3 payments.
As you may have figured I have just shown you how to pay off $150,000 in debt in only 11.6 years with only $10 extra to put in each month.
If your credit rate makes this method harder then it needs to be, you may way to visit this site; Credit Secrets Revealed. There is a free newsletter and a great e-book that will show you the more obscure methods of raising your credit score.
About the Author
Joseph Giordano is a self taught expert on financial matters including; debt managment, credit, business, and general finance. He holds a strong desire to help people with their financial issues.
