Last week I brought up the story of a friend that needed help paying off debt. There were lots of great responses with different ways to get rid of the debt.
A recap of the situation (see the story for all the details):
- Personal Line: $3,500 balance @ 15% – $7,000 limit
- Credit Card #1: $2,300 balance @ 9.6% – $5,000 limit
- Credit Card #2: $6,600 balance @ 8.5% – $8,000 limit
- Credit Card #3: $1,900 balance @ 18% – $2,000 limit
He has $1510 available each month for payments and $9300 in company stock and upcoming bonus money available.
Here are some highlights of what readers have suggested:
1. Use a 0% Interest Card
Transfer all the credit card debt to a 0% interest card and decide on a set amount to pay each month. -John
Get a 0% credit card and put $14,300 on it. Pay himself $1166 each month into ING. Pay minimums on the card each month out of the ING account and pay the remainder off next year right before the 0% comes due. This will allow him to earn interest on the money, stop throwing away interest, and avoid selling company stock.
2. Make Equal Payments
Treat each account as if it was an installment loan and make equal monthly payments that should leave him with a zero balance at the end of four months. He can pay $902.51 each month on the personal line of credit, $586.55 a month on credit card 1, $1679.32 on credit card 2, and $492.95 on credit card 3. This is a total payment of $3661.33 each month. He ends up paying around $350 in interest on all the accounts over that time period. The main advantage to this method is that it’s fairly simple and everything is paid off at the same time.
Five months of interest isn’t enough to sweat the details. The advantage is light at the end of the tunnel – a few months of serious ratcheting back then he’s done! It also seems silly to sell off stock in this short term plan, unless he absolutely cannot payoff otherwise and MUST be done by November. – Jay
3. Pay Highest Interest First
He should pay the minimum payments on the personal line and credit cards 1 & 2. He should sell his stock that he receives and use his bonus to pay off credit card 3 first. Then use the extra money to pay of the personal line, credit card 1, and finally credit card 2.
It’s best to pay off based on interest rate and not on balance or type. Why keep the stock? He won’t, on average, earn more on the stocks than he will be paying interest on those accounts. – Joshua
Use stock to pay off the personal line with the remaining $300 to credit card 4. Pay minimums to credit card 1 and 2 with the rest going to credit card 4. In August payoff credit card 4, and use the stock towards credit card 2 and 3. – deepali
4. Pay Smallest Balance First
Liquidate all non-retirement assets (including company stock and future bonuses) and throw it at the credit cards, in addition to any extra monthly money he can cash flow. Pay the credit cards off smallest balance to largest balance. – Frugal Dad
5. Avoid Future Debt
He should cut up all but one of his cards and decide to never carry a balance ever again. It sounds like he’s fairly intelligent so he should be able to do some ‘light’ reading to educate himself about debt and it’s compounding effects. – Brad
6. Subtract Charges Immediately
Once the cards are paid off, I would suggest on his rewards card that he wants to use for gas that when he charges an item to write it down in his check book (debit it) so that when the bill comes he has already accounted for the charges and the bill can be paid in full. – Dawn
7. Watch out for Tax Ramifications
One way would be to sell your stock, but you should be very sure of the tax ramifications of doing so before selling it. – Beating Broke in Debt Plan: My Dollar Plan Reader
I’ll be back soon with a plan for him. All of these ideas are great, and I’m incorporating many of these points and some others. Stay tuned!