For some people, bills control their lives. My friend is in this situation. Any time we talk about finances, which isn’t often, he brings up how he is drowning in bills. He complains about how big his mortgage is, his monthly car payments, and a number of other bills. Every month he has to work very hard just to make ends meet. His wife works a full time job as well. If something were to happen to either of them they would be in serious financial trouble. After one month of missed income they would start to get threatening letters. After a few months the phone would be ringing off the hook with aggressive bill collectors. Within six months they could lose everything. Most people would not be able to go six months without any income, I know I wouldn’t be able to. The difference between my situation and my friend’s situation is I could live on substantially less income without too much sacrifice to my lifestyle. Why is this? We have two approaches when it comes to bills and debt.

If you are familiar with He-Man you’ll remember his character going from a wimpy guy with a funny hair cut to a bulging muscle man with a funny hair cut. The difference comes after he holds his sword over his head and yells some stuff. The last line he screams to the sky is “I HAVE THE POWER!!!”. This, my friend, is key. You have complete control over your bills. When you get your first credit card in college, pay your own rent, or buy your first car, you have complete control over what your bills will be.

All the frugal living tips will be pointless if you bought too much house, drive new cars that are out of your league (most cars are), and live beyond your means via debt. Peeing in the shower to save on your utility bills won’t make any difference once you’ve made major mistakes in creating your bills.

Note: I’m joking about the peeing in the shower thing.

This last month I was able to pay off all my credit card debt. I’m not paying a single penny to the credit card companies anymore. It’s the first really big goal I’ve been able to achieve with my finances. It feels great and this is how I did it.

Step 1) Be really annoyed by interest (and fees) you are paying. This was the foundation of the goal to pay off all my balances. Every month I would look at my statement or check my personal finance software and see INTEREST PAYMENT or FEE coming from my credit card company. These words started really annoying me. The amount I paid in interest payments was the equivalent to doing something nice every month. When I calculated how much interest I was paying it made my resolution even stronger to pay off all my cards.

Step 2) Switch to an all cash budget. There is no question this step took the biggest bite out of our credit card debt. We used the envelope method of budgeting and it worked. One consideration to switching to cash is losing out on the credit card points. When I tallyed the sigh-up bonuses and other rewards I was actually in the red at the end of it all. Saying good-bye to using credit cards regularly was an adjustment but it feels good to use cash again. Another thing with envelope budgeting is that when the money is gone it’s gone. Prioritizing is something I haven’t done in a while and it feels good. I generally get the stuff I really need and don’t miss out on too many things.

Step 3) Sell Junk Laying Around. You would be surprised at how much valuable stuff you have laying around your house. Think about all the old things you don’t use anymore and make a list. Post your items on craigslist and put the cash you make towards your debt. This exercise helped me realize how much crap I’ve bought over the years and makes me think twice before I buy anything else.

Step 4) Use all extra income towards your debt. Paying the minimum payment won’t cut it anymore. When you get a bonus, raise, or cash put it towards your debt.

Step 5) Cancel your cards. Pull your free credit report and look over all your accounts. Pay off and close all your credit cards as soon as you can. Some people will argue that keeping your accounts open will help improve your credit score but Dave Ramsey would counter by saying you don’t really need a credit score because you’re not going to use debt like a junkie anymore.

In Summary
This is a big deal for us because we had a lot of credit card debt. We bought a fixer upper home and put all the improvement costs on our credit cards. In retrospect that wasn’t the best idea but we’ve learned what not to do in the future. We are now using all the extra money we would have made on credit card payments and are applying it to our student loan, second mortgage, and other debt.

Please share you experiences in the comments if you’re actively paying down debt or are living a debt free lifestyle.

If you have never called your credit card companies you might give it a try. If you have been a good customer with no late payments you’ll have some negotiating power when you call. If you haven’t maxed out your credit card you will get better results as well. When you call tell your credit card company inform them that you’ve been getting offers in the mail with better interest rates. You can also mention that you’re thinking about using a balance transfer card to lower your payments. Ask them what they can do for you in terms of lowering your rate and increasing your credit limit. Lowering your interest rate can help your payback time considerably. A higher credit limit that is not in use will improve your credit score for the next time you call.

Setting up a payoff schedule that works with your budget will have your debts paid off in no time. Don’t shoot for the moon when you set this up. Instead, try something that is doable. The $100 used in this example can change depending on your debt. You want to avoid making the ‘minimum payment’ on each of your cards. Try to be the most aggressive with the highest interest card on the top of the list.

1st phase of payments
A – 14% account – $100
B – 12% account – $100
C – 11% account – $100
D – 9% account – $100
E – 8% account – $100

First order your debts from the highest interest to the lowest. Set up a flat (or consistant) payment you can make on each account every month.

2nd phase of payments
A – Paid off! – Now use this $100 for account B
B – $200
C – $100
D – $100
E – $100

After a set amount of time ‘Account A’ (the first account) will be paid off. Instead of taking that $100 back use it on Account B. You’ve already budgeted for it and it will speed up you payment schedule.

3rd phase of payments
A – Paid off!
B – Paid off!
C – $300
D – $100
E – $100

When you get to Account C you will be putting $300 towards it each month. Continue ‘stacking up’ your entire debt payments on each account until you don’t have any more credit card debt.

Switching to cash is the best way to avoid any credit card traps into the future. It forces you to start saving for large purchases and frees up a lot of wasted money you’d pay in interest. At 22% you’d spend $2,200 a year in interest payments just maintaining $10,000 of debt. Can you image what you could do with an extra $2,200 every year? Switching to cash and paying off your credit cards will help you put this money back in your pocket.

I don’t believe in freezing your cards. If you’ve had real problems with credit cards shred ‘em! Paying off credit cards is very rewarding; psychologically and monetarily.

If your credit card and other debts are too great, you might be considering bankruptcy. It would be advisable to brush up on bankruptcy law as it relates to your situation. In brief, the laws have gotten much stricter. Those filing bankruptcy are having to pay back bigger portions of their their debt. There are even times when creditors break the law by illegally collecting discharged debt.

In addition to those problems credit card companies are seeking a “nondischargeability action” in many cases. They are trying to make your credit card debt something that can’t be wiped away. Even after the bankruptcy the “nonchargeable” debt will still need to be paid back. There are two ways banks can get this 1) The application was fraudlent 2) They prove you used the card without an intent to pay. These new rules apply to both chapter 7 and 13 bankruptcy.

There are a number of ‘red flags’ the indicate you didn’t intend on paying the debt back. If any of these happened there is a good chance the judge will rule in favor of the credit card issuer. Most of these rely heavily on the timing of how you used the card and how you proceeded with your bankruptcy.

• New additional credit card debt shortly before filing
• Many new credit cards and applications for more cards
• Pulling out large amounts of cash from your credit cards
• Going on a dream vacation before you filed bankruptcy
• Moving debt from one card to another as a way to make payments
• Going over your credit limit frequently
• Having all your cards maxed out at the time of filing
• You’ve used your credit card after starting the filing process (e.g. paperwork, lawyers, notifications)

If at all possible avoid bankruptcy.