Want to erase debt quickly? You aren’t alone. How to erase debt quickly is perhaps one of the questions we get asked more often than any other. (Well, that and people want to know the strategies that I used to clean up my credit.)If you break credit restoration down to its most elemental components, it essentially is nothing more than this:
For those of you who have never seen or prepared a balance sheet it is a very simple but powerful document that quickly lets you know your current financial situation by placing assets in one column and liabilities in the other.
Your credit report is like a balance sheet with two columns. Column 1 is good credit. Column 2 is bad credit. A fundamental key to credit restoration is adding more good credit and subtracting all the bad credit.
When we talk about how to quickly legally clear debt, we have to classify debt into two categories:
- Current, positively reporting debt
- Non-current, charged off or collection debt
Each type of debt has its own methodologies for elimination which we will discuss further below.
First, let’s examine positively reporting debt. This would include mortgage payments, car loans, credit cards, installment loans, student loans, lines of credit, etc. From a credit restoration standpoint, we always want to eliminate revolving compound interest accounts first (credit cards). The reason here is because the percentage of debt limit to utilization on the card has a significant impact on your credit score and eliminating positively reporting debt on credit cards is one of the fastest ways to improve your credit score. So, the goal here is to pay off the credit cards as quickly as possible. There are a number of strategies on how to do this and everyone has their own opinion on the best methodology. For example, Suze Orman advocates paying off the highest interest credit cards first regardless of their balance. Dave Ramsey on the other hand advocates paying off the smallest balance credit cards first and working your way up from there with the next highest balance and so on so that you build quick momentum and see fast success. It is important to note that both of these strategies are sound IF your only concern is financial planning and debt elimination. If, however, you are working towards qualifying for a mortgage or car loan and need to the fastest improvement to your credit score, neither of these strategies is the best or most effective. So, what is?
Simple, you make a list of all of your positively reporting credit cards. Then, you divide the total amount owed by your credit limit to get your utilization ratio. For example, if you owe $8,000 on the card and you have a $10,000 credit limit, simply divide 8,000 by 10,000 and you get .80 or an 80% utilization ratio. In simple terms, this means your outstanding balance is 80% of the credit limit. This is called your utilization ratio and is a key factor in your credit score. Once you have calculated the utilization ratio for all of your cards, you want to systematically get them all down incrementally to certain percentage benchmarks. In other words, if you have 5 cards and the utilization ratios are as follows:
100%, 80%, 75%, 43%, 15%
then what you would do is begin by paying the cards with 100%, 80% and 75% utilization down to the 50% utilization percentage, not paying the cards with 43% or 15% at all at this point. Then, once those three cards hit 50%, you start paying those three and the 43% card down to 33%. Then, once you hit 33% on all cards, you begin systematically paying them off. The reason here is because your score is significantly impacted by the percentage of utilization as an overall total, but also as it relates to each card. So, ideally, you want to get your overall utilization down as well as the utilization percentage per card down. Again, this method is only utilized if credit scoring is important. If you are working towards debt elimination and want to quickly erase debt, personally, I think Dave Ramsey’s strategy is the best because although it can be argued that you pay higher interest using his system versus Suze Orman’s, in my opinion, the psychological impact of seeing a credit card or several credit cards with small balances paid off quickly gives you much better staying power than trying to chip away at a huge balance with a high percentage rate where you will likely feel like you aren’t making forward progress and give up. (This is why getting a single consolidation credit card is not always the best idea.
Ok, this post is running infinitely longer than I anticipated so we are going to continue to talk about erasing credit card debt in another post. If you simply cannot wait to get the rest of the information, it is all covered on the members only side of Credit Repair College and you can gain immediate access here: Erase Debt Quickly. You will also learn all the strategies that I use to repair my credit and how to earn cash online and deal with credit card default.
Otherwise, stay tuned and we will continue our journey on the top 5 ways to erase credit card debt quickly (and just so you know, several debt eraser methods do not require paying them off to get them erased from your credit report!)