Game On: Strategies for Paying Debt
By Paula Ryan
Published in Resolve, for the Journey and Beyond, Winter 2012
You know how it happens — one swipe at a time — those credit card balances build up quickly. Each with its own interest rate, credit limit, and payment terms — some become "maxed out" and others are brand new and ready for charging.
My husband and I learned how to use credit wisely during seven years of paying for infertility treatment. By the time we had "doubled-down" on several extremely expensive medical treatments, we were old hands at managing the debt we had racked up. But we while we were awed by the amount of money we were able to borrow (and required to repay), we were undaunted. Deciding to take on debt to have a child, and paying it off together, was one of the best financial exercises we could have done during the first years of our marriage. We came out of it with golden FICO scores and an understanding of financial management that will help us the rest of our financial lives — and we were the only couple in our neighborhood who celebrated "paying off the baby"!
Here are some of my tips for aggressively managing the debt that is so often part of the infertility experience and a part, for that matter, of modern financial life. While I recommend consulting a professional for your particular situation, the following process can be used as a guideline:
- If you do not have a budget, put one together. Decide how much of your budget can go to paying down debt.
- Make a list of debts by name, adding columns for balances, minimum payments, and interest rates. (We used a spreadsheet to track our debt situation monthly. Note which debts are tax-deductible and which have the highest rates.
- Smallest-to-Largest Strategy: Total up the minimum monthly payments on all debts, and subtract this from the budgeted amount for paying down debt. Use all of the excess to pay into one credit card — the one with the smallest balance. Pay off this first debt until it is gone, and maintain minimum payments on other debts. After this, use all excess funds to pay off the next smallest balance, and so on, until you have brought the debt under control. The "smallest-to-largest strategy" means that you must put successfully larger payments into remaining debts as you knock out the smaller balances.
- When faced with two roughly equal-sized debts, pay off the one with the higher interest rate or the highest minimum payment.
- Generally, pay off credit cards/higher interest debt before student loans, and pay off student loans before home equity loans. (Both student loans and home equity loans are tax-favored debt, i.e., you may be able to take a deduction for interest paid on them against earnings on your tax return each year. Again, consult your tax professional for guidance specific to your situation.)
- If you are having trouble making all minimum payments, call your lender to negotiate a lower minimum payment.
- As them if they have any credit offers — like a 0% interest rate on transferred balances — that will help you consolidate your debt. Always ask what fees are associated with balance transfers, and calculate the cost of making this transfer. While a rate of at least 3% per balance transfer is standard, rates of 4% and 5% can apply, so ask questions until you are confident that you know what they are offering, and how the transfer must be done so as to minimize costs.
- Confirm what the minimum payment will be before agreeing to the transfer.
- Be careful about offers that require minimum purchase — companies will often charge a high rate on the minimum purchase amount, and set this balance for payoff after paying off special program balances, so they get to charge a high rate of interest on your required purchase from the beginning. Also, be careful not to request a balance transfer that puts you over your credit limit, as there are often fees/penalties that will apply.
- If you are going to consolidate credit card debt, I recommend making two payments monthly for an amount equal to or above the minimum payment. This way you will not miss a minimum payment because of the timing of a single payment, triggering a penalty fee plus an increase in the interest rate.
Paula Ryan is a financial advisor with Raymond James and a veteran of seven years of infertility. Paula works with individuals, families and GLBT couples nationwide with managing the financial side of family-building. She lives in Boulder, Colorado, with her husband and six-year old daughter and can be reached at www.raymondjames.com/ryan/.