If you’re saddled with high-cost credit card debt it can feel like you are in a prison. That expensive old debt weighs down your credit rating so it’s hard to refinance at a lower rate. And because so much of your income is going towards your pricey interest costs, you don’t have much cash left over to pay down the debt. Oh the humanity of it! What’s a good Pilgrim supposed to do?
In my opinion, there are 3 steps to take in order to end this vicious credit cycle. You may be familiar with some of these ideas but some will be new. Regardless, go through each alternative and implement as much as possible. This will make each succeeding step that much easier. Let’s get to it:
1. Build Your Snowball
You’ve probably heard a lot about the idea of a “debt snowball”. This is a term that was created by Dave Ramsey and there a number of iterations of this idea. In my opinion, the best way to apply the concept is to make minimum payments on your lower cost debt and apply all the cash you possibly can towards the highest cost debt. This way your most expensive debt is extinguished as quickly as possible.
Once the high premium cost debt is off your books apply all your free cash towards the next-highest cost debt while continuing to make minimum payments on everything else. This is a genius system because it uses each dollar most effectively. And while at first it may feel like the results manifest too slowly, if you have patience you’ll be amazed how quickly your debt melts away. It’s a beautiful thing friend. Believe it.
Note – If you are considering using the peer-to-peer method described below, your main focus should be to extinguish the smaller loans first rather than the highest cost debt. That’s because the more loans you can remove from your credit report, the higher your credit score will be. And the higher your credit score, the more attractive you are to would-be lenders that you’ll meet in the peer-to-peer business. Of course, the more attractive you are as a borrower the lower your interest rate. Very cool.
2. Invite Your Friends And Family To Share In Your Success
This isn’t appropriate in all situations, but if you can, ask your friends and family if they’d like to invest in you by refinancing your debt. The idea is that you’ll pay them more than they can possibly earn in the bank so it’s a win for them. But your cost will still be substantially below the rate you currently pay to your creditors so it’s a win for you as well. Sweet.
If you go this route, make sure you have a debt repayment plan written down and present it to your would-be partners. Show them exactly how much you earn and how much it costs you to live. Hopefully, there will be an ample surplus there which will be used to repay your debt to them. (If not, sharpen your pencil and slash more of your costs. Only go to your family and friends once you are certain your repayment plan is going to work.)
In order to really show them you mean business, offer to make automated direct deposits into their checking or savings account each month so they never have to worry about running after you to make your payments. These people are helping you. Show them you love them and make their lives easy.
3. Peer-to-Peer Lending With A Twist
Once you’ve done all you can to snowball your way out of debt and refinance with friends and family, it’s time to think about peer-to-peer lending. In case this is something you haven’t heard much about, it’s simply a business which matches private borrowers and private lenders. Lending Club and Prosper are the biggest players in this industry.
Borrowers like you want to cut their high interest costs and private lenders want to earn more than the bank offers. Think of this as a way to expand your circle of friends from step 2 above. Rather than just having ten or twenty contacts to roll through, peer-to-peer lending sites give you access to tens of thousands of people who are eager to invest in people like you. Righteous.
I’ve been sending borrowers to these companies for years and have heard nothing but great success from borrowers and how they’ve been able to cut their interest costs by 30% or more. And if I was a borrower, it would be a no-brainer for me to try to refinance my debt after going through the 2 steps I outlined above. Actually, it’s not inconceivable to reduce your interest costs by 50% or more. It depends on the current rate you are paying and your credit score.
But having said that, I want to point out two little twists that can make a huge difference and save you a ton of dough if you pursue this:
1. Credit Score
As I explained before, the higher your credit score the lower your interest cost will be. That being the case, it behooves you to do whatever you can to pump that score up.
In most cases, you can take meaningful steps yourself without paying anyone. And the right action might boost your credit score pretty quickly. If you think you have a good shot at significantly increasing your credit score, go for it. Get into serious action in that department and after you see your score rise, consider getting involved with the peer-to-peer people.
2. Planned Solution
Lots of people who use peer-to-peer lending are able to cut their interest costs big time. But they fail to really take advantage of it. They enjoy lower interest costs and they just spend the savings. Then, when the loan term is up, they refinance their debt over again.
That means they are still in debt prison. Maybe the conditions are a little better, but they still haven’t achieved the freedom they deserve.
Don’t let that happen to you. If you are in debt now, let’s get you out of debt once and for all. Build yourself a debt freedom plan and stick to it. If you refinance your debt with peer-to-peer lending (or with any other source for that matter) make sure that you create a savings and spending plan that solves the underlying problem for good.
High cost debt is a big problem – but it doesn’t have to be your problem anymore. Slay your interest costs by using the snowball method and refinancing with family and friends. If you still have outstanding (expensive) balances left, look into using a peer-to-peer lender to cut those interest costs.
Are you carrying expensive debt? What have you tried to do in order to solve the problem? What’s worked best? What challenges do you still face?