You Need Another Monthly Payment Like You Need A Hole N Yo Head

I gave my love, I gave my life, I gave my body and mind.  We were inseparable. I guess I gave u all of my time.  And now u plead insanity and u don't even know the score
Why can't u learn 2 play the game?  Baby, don't u know that u need more? (More, more, more) - anotherloverholenyohead,  Prince

We are way too comfortable with revolving debt. After mortgage or rent, car notes are usually the next largest monthly payment. For some it may be a student loan, especially if you went to a private college or if you are a doctor or lawyer. But, the thing we need to be focused on more than anything else is this revolving debt on credit cards.

Let’s break this down so we truly understand how credit cards work and why people often advise us to:

1. Stop using credit cards
2. Pay off credit cards as soon as possible

"Interest is the penalty you pay for the right to own something in advance, that you cannot afford." - Unknown

When we use credit cards we are saying that we want something so bad that we are willing to pay more for it than it's worth. Please read that sentence again.

Let's take a look at a credit card with a $5,000 balance:

• Minimum Payment: $100.00
• Interest rate: 21%

The problem is the interest we pay. The interest rate doesn't mean you pay 21% of $5,000 or $5,000 x 0.21 = $1050. Giving you a total payment of $5,000 + $1,050 = $6,050. It works a little different than that. Let's work through this together...
*(remember you have to change percentages into decimals so 21% = 0.21)

If your interest rate is 21%, divide that by 12 months to get your monthly interest rate

• 21% / 12 months = 1.75% per month

To determine how much interest you pay each month multiply your monthly interest rate by your total balance:

• 1.75% (monthly interest rate) multiplied by your balance of $5,000 = $87.50 or
• 0.0175 x 5,000 = 87.50

This means that when you made your minimum $100 payment, $87.50 went towards interest. Which also means that your principal payment was $100-$87.50 = $12.50. You just paid down $12.50 out of $100.

At this rate it would take you 119 months to pay off a $5,000 credit card. 119 months. Let that sink in, 119 months. How did we calculate 119 months? You can use another online debt calculator like this one: http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx or to calculate it by hand you will need to subtract the principal payment each month and multiply the new balance by 1.75% to see how much is going towards interest versus principal (ex: $5,000 - $12.50 = $4,987.50 now multiply $4,987.50 x 0.175 = $87.28125). I did create an Amortization Schedule in an Excel Spread Sheet below to verify the accuracy of the debt calculator and to show you how much you pay towards principal and interest with each payment. This is how the credit card companies calculate the information in the box on your statement that tells you how long it will take you to pay off that credit card if you make the minimum payments versus how much is required to pay off that same credit card in 3 years.

• 119 months divided by 12 = 9.9 years or 9 years and 10 months
• Your total payment after 9.9 years: $100 x 119 = $11,900
• Which means you paid $11,900 - $5,000 = $6,900 more for something(s) that was worth only $5,000. That's more than twice what it was worth.

This is why I'm determined to get out of debt. This is why debt is slavery. This is why it's not wise to use credit cards.

Transparency Moment: When I was struggling I did the 0% interest rate credit card shuffle. I would move balances from one card to the next and take that 3% or 4% transfer fee hit if it made sense mathematically (not all cards charge you a transfer fee). But, ALWAYS do the math! Don't take a 3% fee hit if you can pay that card off in a short amount of time and the interest you pay in this time is less than the 3% fee. The beauty of the 0% credit card shuffle is it normally gives you a lower minimum payment and you forego paying any interest, which helps if you are in survival mode. The drawback is if you don't attack the balance you're just moving debt around and not making progress. It will give you a false sense of accomplishment.

Survival Tips
Now let's talk about survival tips. Like I said before, if you're in survival mode you can't hear what I'm saying anyway, trust me, I know, I've been there. When in survival mode organizing and prioritizing are a necessity. The recommended order for paying things is as follows:
1. Food
2. Utilities
3. Rent/Mortgage
4. Transportation

The basic necessities of life (food, shelter, clothing, transportation and utilities) are always a top priority when you’re under water in debt. Before a person can make any payments towards debt the four items above should be taken care of. If you can't pay the four items above then you are in emergency mode and something has to change quickly whether that is selling something like a car or even your house or finding a second job. Once you can pay all of your necessities then you can focus on your debt. The two debts you cannot play with though are tax debt and student loan debt. The last thing anyone wants is for their money to be garnished so it's important to make arrangements regarding these debts as soon as possible. You can't close your eyes and pretend they don't exist until you get more money. The rest of your debts will have to wait until you get to a stable place. So let's review, in survival mode it is recommended to first pay your four necessities bringing them current if they are not, then make arrangements for any tax or student loan debt, lastly you can start to address and pay any remaining debt.

Let me be clear, these are just recommendations, you have to choose what's most important to you. If you are a renter you know you cannot go several months without paying your rent because you will be evicted. The same applies to a car note, you can't go several months without paying your car note because they will repossess it. If these are your largest monthly debt payments, you may want to rethink selling one or both or downsizing.

The last thing I want to say is I know that each situation is different. Survival mode is scary. But I am a witness that through prayer and fasting, literally, God protected me while I was in it. No matter how hopeless your situation may look, it will change, it will turn around. Nothing in life lasts forever, nothing. Everything changes including the bad. So please be encouraged.

Progress Report: I have paid off two credit cards. I will have credit card number 3 paid off in the next few weeks. Three months completed, 33 more to go.