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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

Five Steps for Ditching Credit Card Debt

by David Bach

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Posted on Monday, July 30, 2007, 12:00AM

I've spent a lot of time teaching Americans how to get out debt. From television appearances to books to speeches, I've tried to proactively address how to fight the credit card companies at their own game.

CardTrak.com reports that the median amount of credit card debt carried by a typical American is about $6,600. But 13 percent of participants in a recent online poll reported balances higher than a staggering $25,000.

Many of these families now have over nine credit cards per household. That's not hard to believe considering that the average college student now graduates with three credit cards.

Kill Off Your Credit Card Debt

The question for many of these people is, "How do I know which of these cards to pay off first?"

To that end, I developed a system that helps consumers prioritize their debt payment plans for my book "The Finish Rich Workbook." It's called DOLP, which stands for Dead On Last Payment, and DOLPing your way out of debt is all about building momentum as you systematically pay off each card, one by one.

Back in a February column, I introduced you to Dan and Sally Eggleston, with whom I've been working over the past two years. We met on "Oprah" while taping the Debt Diet series, and the Egglestons have made amazing progress toward wiping out their debt.

Using the DOLP method, they've gone from 13 credit cards down to 4; in 90 days they'll be down to 3. They've reduced their $72,000 in credit card debt by over $25,000 so far, and by doing so they've also increased their credit score by over 100 points.

Do the DOLP

This same system can help you, too. Like Dan and Sally, you can get a true handle on how much you owe and how to put a payment plan into action in a matter of minutes. Here's what you need to do get DOLPing:

1. Make a list of the current outstanding balances on each of your credit card accounts.

2. Divide each balance by the minimum payment that particular card company wants you to make. The result is that account's DOLP number.

For example, say your outstanding Visa balance is $500 and the minimum payment due is $50. Dividing the total debt ($500) by the minimum payment ($50) gives you a DOLP number of 10.

3. Once you've figured out the DOLP number for each account, rank them in reverse order, putting the account with the lowest number first, the one with the second-lowest number second, and so on.

You now know the most efficient order in which you should pay off your various credit card balances.

4. Pay as much as you can each month toward the card with the lowest DOLP number. For each of your other cards, make only the minimum payment.

5. Once a card is paid off, cut it up -- but don't close the account! Leave the account open so you have credit you aren't using, which will help improve your credit score.

Now move the next card up on your list and repeat the process until all your cards are paid off.

Track Your Progress

I had Dan and Sally create a DOLP chart that was big enough to hang in their kitchen. This is a great way for the whole family to keep track of where they are in the process of wiping out their debt, and it serves as a reminder of their ultimate goal and helps them stay focused.

Tracking which cards have been paid off is a huge emotional boost, and propels you toward future progress. Here's a template you can use to create your own DOLP chart:

AccountOutstanding BalanceMonthly Minimum PaymentDOLP NumberDOLP Ranking
Visa$500$50101
MasterCard$775$65122
Sears Card$1,150$35393

Negotiate Interest Rates

Other experts will suggest that you pay off your cards in an order based on the interest rate each card charges. I disagree with this method simply because you should be negotiating a lower interest rate with each credit card company from the very beginning. (See my column "Credit Card Hazards and How to Avoid Them" for details.)

Once you've asked for a lower rate, you may end up with pretty much the same interest rate on all your accounts. In Dan and Sally's case, they were able to lower most of their cards below a 5 percent interest rate -- and many of them had been as high as 29 percent.

Breaking a Vicious Circle

Being in debt can be depressing and overwhelming. The more credit cards you have the more bills you have to worry about paying on time, and just trying to stay on top of all those bills inevitably leads to mistakes like late payments.

Late payments can cost you upward of $30 a month, higher interest rates of up to 30 percent, over-limit fees of up to $35 a month -- and more stress. DOLPing your debt helps you break this cycle.

For instance, Dan and Sally went from 13 cards to 6 in less than 6 months. It was a huge relief for them, and also a huge motivator because they could see the progress they made so fast.

Patience, Persistence, and Progress

Although the DOLP method is simple, getting out of debt isn't. It may take months or even years to pay off all your credit card debt. My experience is that it can take twice as long to get out of debt as it took to get in it. But you can do it, and it's worth the effort.

Today, Dan and Sally's DOLP chart still hangs in their kitchen, serving as a constant reminder of their progress as well as the work they still have left to do. I'm really proud of what they've accomplished to date, and they serve as a great example of how patience and persistence can pay off on the road to financial freedom.

I hope this tool helps you. If you have other debt-management methods you'd like to share, please leave a comment below.

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  • Yahoo! Finance User - Friday, September 21, 2007, 3:01PM ET  Report Abuse

    • Overall: 3/5

    I believe it is better to analyze each month what the card is actually costing you (the actual finance charge). Then,if you can, pay more on the one that is costing you the most. Paying the highest interest rate doesn't necessarily save you money. If you only owe $50 on a card with a 30% rate, it is only costing you ~$1.25 a month in interest. If you have a card that has a lower rate, say 18%, but has a higher balance of $1000, it would be costing you ~$15 a month in interest. Get a spreadsheet and figure it out each month and put your extra money toward the card that is costing you the most. Of course, at a certain point, you may just want to pay off the remaining balance of a card if you have the availability to do so. It is always encouraging to be able to close off an account once in a while.

  • Paul H - Friday, September 21, 2007, 2:50PM ET  Report Abuse

    • Overall: 2/5

    I tried calling the credit card companies to lower my interest rate and they all told me the same thing. That they couldn't do that at this time. I contacted one company that had a much lower interest rate than the card companies and I am going to go through them to pay off these higher interest cards. The interest on the cards is an avg of 16.99%. The company I am going with is 9.99%. Yeah, it may be robbing Peter to pay Paul, but I will be saving about $400 a month doing it this way, which I can apply to other debt and get that paid off faster. Once I get the credit cards that I called paid off, I will be cancelling them. Leaving them open is just like leaving a door open in house for strangers to walk in. It can only lead to trouble. Plus, when they try to talk me into keeping the account open, I will have the satisfaction of telling them, "you weren't there for me when I asked for a lower rate, so now I am going elsewhere." I know there are many different ideas that people have to eliminate credit card debt, but the bottom line is that card companies are crooks by charging more than they really need to and the best way to get it taken care of is to look for the lowest interest rates and transfer what you can to that. The money you save, you apply to other debts or make bigger payments on the new loan. In the meantime, pay cash or don't buy it.

  • izzy - Friday, September 21, 2007, 1:50PM ET  Report Abuse

    • Overall: 3/5

    how does one go about negotiating interest rates?

  • Penny - Friday, September 21, 2007, 1:36PM ET  Report Abuse

    • Overall: 5/5

    i will by the book

  • Fay - Friday, September 21, 2007, 1:31PM ET  Report Abuse

    • Overall: 3/5

    Hey- why not do what we did- use the equity in your home to pay off your credit cards AND pay off your mortgage earlier! Instead of going the long and tedious route that they mention in this article, which I did try and didn't seem to get anywhere with the debt- we used an interest cancellation program calle dthe Money Merge Account. We will actually have our mortgage paid off in half the time and it is saving us a lot of money in interest. We filled out the analysis on this site- www.u1stfinancial.net/johnfechik and the agent called us to let us know we qualified for the program- I guess not everyone does- it depends on your equity available in your house and your credit scores and some other things. Anyway- without paying any extra money out of our pockets each month and ACTUALLY SAVING money each month- we will have no mortgage payment or no other debts in about 15 years instead of 30! How awesome is that!?? I know that even if I stuck with the program of paying down higher interest rate cards first or other methods, we still wouldn't get the same results of using the MMA program!

  • saundra - Friday, September 21, 2007, 1:23PM ET  Report Abuse

    • Overall: 4/5

    I'm working toward getting out of debt.I have $21,000.00 to go. Its the IRS,Student loan, credit cards and child support.I give myself 36 month to take care of this matter.I WILL DO IT,thank for the story,I feel better knowing I'm not the only one in this mess.Good luck Dan and Sally!!!!!

  • Yahoo! Finance User - Friday, September 21, 2007, 1:17PM ET  Report Abuse

    • Overall: 2/5

    I do believe that it can take you longer to get out of credit card debt than it did to get into it, however I do not believe you should leave all your credit open after you've cut up your cards. If you're trying to buy a house in the next 3-6 months, then, yes, leave the accounts open, you'll need a good credit score. But if you're settled in, not going to make a major purchse, cut'em up and close'em up. The only thing bad about a low credit score is how it looks to a creditor when you're trying to get a new loan. It's amazing to think how the marketing of a credit score has become so popular, right up there with the marketing of prescription drugs. I have been following the methods set out by Dave Ramsey in his FPU classes and I have to tell you, I've made some major headway in killing off credit cards. If you've not heard of him, I recommend you Google search and make your own decision. But for my house, we're moving towards being debt free, no credit card debt soon, and we'll be paying extra towards the house before we know it. You walk in with cash, you can get a deal. 90 days for 98% of the people is not the same as cash.

  • Jen - Friday, September 21, 2007, 1:11PM ET  Report Abuse

    • Overall: 1/5

    Yeah--this would be helpful IF IT WERE POSSIBLE FOR EVERYONE! The real tips should be, rank your cards in order of interest rate. Pay the highest interest rate first and go down from there. If you so happen to have all of the same interests rates (which is highly unlikely unless you have stellar credit--and if you have stellar credit you would not be reading this) then pay off the highest balance first. It makes that lower balance seem so minimal once you actually get around to paying it off. The one thing I do agree with is paying as much as you can to one card and minimums on the rest. It definately shows more progress that way. My last tip--round your payment to the higher ten dollar mark (example, if your minimum is $34, pay $40. If you min. is $59, pay $60. If you min is $21, pay $30). It will make your debt disappear faster..

  • Jason - Friday, September 21, 2007, 1:10PM ET  Report Abuse

    • Overall: 5/5

    Hey Christi, get a brain, and Kim, if you lose your job you will never be able to pay a bill off! If you pay the lower balances first, any never look at the DOLP which basically is the highest percentage rate, it will take you longer and cost you more to pay them all off. This article basically categorizes what cards have the highest percentage rates and puts them in an order that dumb people can figure out. If you just look at your statement you will see what the percentage rate is, and then you pay the one with the highest rate first....same thing.

  • Yahoo! Finance User - Friday, September 21, 2007, 1:09PM ET  Report Abuse

    • Overall: 2/5

    OK, but how does one eliminate the obscene over limit and late fees??? I make payments and my accounts are going UP instead of down!!!!!! How does one get rid of those?

  • Yahoo! Finance User - Friday, September 21, 2007, 1:08PM ET  Report Abuse

    • Overall: 1/5

    Anyone who tells you to leave a credit card open (without using it) is most likely getting a kickback from the company in question. Having an open credit card with a nice zero balance is like asking an alcoholic to work in a bar - the temptation is just too great. Most likely, the person will use the card again, and 'promise' to pay it off - until something happens and he or she can't, possibly ending up in worse shape than before. Don't tempt yourself - close the account.

  • Kelly R - Friday, September 21, 2007, 1:07PM ET  Report Abuse

    • Overall: 2/5

    IF you can get all your cards to the same or similar interest rate, then this makes sense. But if you can't, you are far better off paying off a 20 % interest card first. You will save hundreds or even thousands in interest payments. Think about it....if you are paying only the minimum on a card at 15% and everything toward a card with an 8% rate, then sure that card will get paid off quicker. But at the same time, you are accruing 15% interest on your balance on the higher card. In the long run, even though you may have "eliminated" one payment fast, you have earned yourself extra months or even years to pay off all the interest that accrued on the other card.

  • Christian Muller - Friday, September 21, 2007, 1:06PM ET  Report Abuse

    • Overall: 5/5

    This is an excellent method and one that personally used (even before reading it here). For those of you in a better position, you can take this one step further. Once a card is paid off, take that minimum payment and add it to the next card's payment. This "doubling" up will speed things and you be debt free faster.

  • tania - Friday, September 21, 2007, 1:00PM ET  Report Abuse

    • Overall: 3/5

    This was an okay story IF you have the monthly capital to cover all of your other bills. To Lisa In South Florida I am in total agreement with you because I am in a similar situation. Some suggestions you might consider (if you haven't already): I have signed up to do mystery shopping and paid online surveys at about 10 different sites for added income. This adds an additional $60-$150 a month. I religiously cut coupons out of the Sunday paper, I shop at the Goodwill stores (and people at my office job swear I shop at the mall and spend too much money on clothes!) You might also look into getting a Notary license. I do about 2-3 signings a month at $175-250 per signing. It used to be about an average of 10 signings when the market was better. (I live in Calif. and the market is really bad!!) I hope this helps!

  • christi - Friday, September 21, 2007, 12:56PM ET  Report Abuse

    • Overall: 2/5

    Why don't you just pay off the lowest card first & then the next. It is simpler that way. Instead of going through all those steps. That's is the way I'm doing it & it's shows positive results. It feels really good when you pay off one & then another

  • Yahoo! Finance User - Friday, September 21, 2007, 12:56PM ET  Report Abuse

    • Overall: 1/5

    I hope the poster wasnt paid for this response. I figured this out years ago--

  • Kimber - Friday, September 21, 2007, 12:46PM ET  Report Abuse

    • Overall: 1/5

    My husband has been out of work for 2 months! My job here requires a degree so we are stuck. We really don't have a lot in credit card debit. So what can we do with no income to talk to creditors to give us a leaway? They WONT! They dont care! Yes we have been faithfull and on time for 3 years but one thing happens and forget it they wont help you bacK! This info was NOT helpful!

  • EMILIOM - Friday, September 21, 2007, 12:44PM ET  Report Abuse

    • Overall: 5/5

    It makes sense to pay off the card with the lowest interest. I realize that I was wrong, consequently, I'll reverse priorities and hope to pay off my $18,000 debt following the advice given here. thanx.

  • Mar - Friday, September 21, 2007, 12:41PM ET  Report Abuse

    • Overall: 5/5

    thanks for the info...its nice that there still good people helping others. more power to you. lets beat the credit card companies at their own game.

  • Lisa - Friday, September 21, 2007, 12:41PM ET  Report Abuse

    • Overall: 1/5

    If getting out of debt were this easy I would have been out of debt a long time ago. It is a great idea but what about those of us who use our credit cards to feed our family because our income is isn't enough to pay our bills. And don't tell me to quit going out to dinner, going to movies, and getting manicures. I quit doing all of those things and more, years ago. Tell me what a person is supposed to do when I make "too much money" to get government help but my husband can't work and we have been waiting a year and half to get him on disability. How am I supposed to keep up with the rising cost of living in South Florida, 4% says the experts, with a family of four and one income. We have already moved our family from a house to a mobile home. Tell me where to get help so that I don't have to use my credit card to buy my food each week.

  • waf - Friday, September 21, 2007, 12:39PM ET  Report Abuse

    • Overall: 1/5

    You should pay your credit cards by interest rate. Cards with higher rates should be paid first. You should try and consolidate your debt onto a single card. You can usually get an excellent interest rate on balance transfers. Once you transfer your balances do not use that card for additional purchases. Just use that card to pay down your debt. If you have to make purchases you should have a second card. What typically happens is that people transfer balances and make purchases on the same card mixing the interest rates they received. Credit card companies apply payments to the lower interest rate first before you start paying off the debt incurred at the higher rate. So each month you're paying down your lower rate, in this case the balance transfer amount while the purchases incurred remain as part of your outstanding balance at the higher rate. Also depending on your financial situation, you should typically send more than just the minimum payment. Sometimes the minimum payment is less than the finance charge applied to your account for the month. So even if you didnt purchase anything that month and you paid the minimum balance on time, your outstanding balance can still go up.

  • DmitryP - Friday, September 21, 2007, 12:39PM ET  Report Abuse

    • Overall: 2/5

    Like it was mentioned in previous comments. This works if you have just few of cards and nothing more than 20k in debt.

  • Yahoo! Finance User - Friday, September 21, 2007, 12:22PM ET  Report Abuse

    • Overall: 1/5

    You assume that the person in debt can just turn off the faucet, pay off the bills and live happily ever after. You ignore the root cause of the problem in the first place and that is either the person has no self control or the person doesn't earn enough to live on and pay the debt. Over simplification is the method used here. It's a joke to read your solution.

  • Yahoo! Finance User - Thursday, September 13, 2007, 12:10AM ET  Report Abuse

    • Overall: 5/5

    Credit Card debt was rarely a thing I even really thought about. But, today, when reading closely the credit card details of some card offers that my grown children are receiving like Orchard Bank, Premier Bank, etc. I have come to realize just what snakes in the grass these companies are with their charges for this and charges for that and even know a man who applied for a Premier credit card and now is told he canNOT cancel the card because he owes all of these fees for the next 11 months. : ( So, cash on the barrel head in our household. It's NOT been easy. We only have $1000 in credit card debt at this time. Our home is paid for. We have 2 vehicle loans and one is only $4500. The other $17,000. It's my hope to be debt free ASAP!!! I will tell you this though, while it's been rewarding paying off those credit cards, living like this right now is a little difficult. Where we'd of just done the things we wanted to do before, we now have to have more resistance and sometimes it is depressing. No vacation for us for the past two years. But, I know the day we can stand up and shout, "WE ARE DEBT FREE!!!" we will come alive and cash it is for this family. If we don't have it, we don't need it if we can't pay cash for it. We have set up an emergency fund as well so hopefully it will carry us through any true emergencies. We are in our 50s and hope that we set the proper example for our grown children. Applying for a credit card today is easier than ever and a bigger rip off than ever before as well. Thanks for the tips. We did NOT really use the DOLP score but did pay off the one we owed the least to and then went on to the next one. We've almost got the last $1000 paid to our Visa and then we start on the car with the $4500 balance. We applied for a Sears credit card about a year ago because it was 6 mos same as cash and we wanted to buy a new refrigerator. We decided to wait until we saved up the money to buy it. Recently the bill came and it was for $25 for a "reward" fee. Some reward. I told Sears to cancel the card. They wrote back and said they needed "more information." Now I received another bill for $25 for the reward fee, $15 for a late fee, and $1 for finance charge. Uh, NOT!!! So, we have now cancelled the card and gotten the "late fee" and the "finance charge" removed. The only way to accomplish this was to cancel the card. Of course, no mention was made of the 23-39% interest rate when they were telling us about 6 mos. same as cash. : ( And, no one mentioned a "reward fee" either. We filled out an application at Sears and were approved by phone. I've never carried the cards in my wallet but I really should have looked more closely at the "specifics". Now, I just think no credit cards is better than getting stuck with this crap. I've become a much more savvy financial officer of our money. I don't need credit cards for the majority of my dealings. For those that do require a credit card I suppose my only alternative left is to use a debit card. I really prefer not to use one of those either. I just don't know how to do the things I need to do with no credit card and no debit card. Thank you

  • Paul V - Monday, September 10, 2007, 11:41PM ET  Report Abuse

    • Overall: 3/5

    Why not just pay off the card with the lowest balance first and snowball the payment to the next balance? Don't bother with the DOLP thing. Keep it simple.

  • Brad - Wednesday, September 5, 2007, 3:45PM ET  Report Abuse

    • Overall: 5/5

    I believe the DOLP method works better than paying the highest interest rate cards first for this reason: You're told to pay as much as you can to the first card on the list. Once that is paid off you do the same for the next. Keep in mind that now the amount you can pay is what you paid before PLUS the extra money you no longer need to pay to the first card. Once the first two are paid off, now you can pay as much as you can PLUS the money you had to pay for the first two cards and so on. The more cards you pay off, the more money you have to pay toward the rest of your cards and the snowball (in your favor) grow bigger and rolls faster.

  • Yahoo! Finance User - Thursday, August 30, 2007, 6:52PM ET  Report Abuse

    • Overall: 5/5

    This method works. I am working to get out debt and helping my daughter, too. Whittling cards down builds confidence and reduces the stress of paying multiple ceditors. Good luck to you!

  • __A_YAHOO_USER__ - Tuesday, August 28, 2007, 7:47AM ET  Report Abuse

    • Overall: 4/5

    While most financial experts would agree paying off the highest interest rates first makes more sense financially, the DOLP method is good because it allows you to have more of a sense of accomplishment by paying off your smallest balance debts first. However, my problem with the DOLP method is it's not accurate in showing you the time frame of paying off each debt and the effects of higher or lower payments. I use a (free) website for managing my debt payments. The site is https://powpay.org You'll need to register (for free), enter your current balance and interest rates, your (expected) minimum payments and the extra amount of money you wish to apply to your payments (your power payment). Then you view a detailed schedule for payments on all your debt, when each will be paid off based on highest interest, lowest balance, or shortest term. By using this site I have decided to pay off two of my bank loans first with the lowest balances (and slightly lower interest than my credit cards). Based on my payment plan and selected order of payments I will have two of my bank loans paid off by this time next year. I know I will be moving around this time next year and will definitely have a lower income, so for me reducing my required minimum payments is an absolute must for maintaining my peace of mind. Once these two are paid off, I will reassess my payment plan and decide whether to continue paying off my lowest balances or switch to the highest interest rate cards first. By following this plan I know I will pay off my $40,000 in debt by June 2010.

  • BRAD - Friday, August 24, 2007, 3:58AM ET  Report Abuse

    • Overall: 4/5

    There is a psycholgical factor that got people to aquire cc debt, and there is one to get them out. While some may say pay the highest interest rate cc first. I agree with David, pay the lowest balanced card first...after you have spoken with your credit card companies to lower your rate. When you have one less bill to pay each month, it will start to feel as if there isn't anything you can't do. You really will start to feel/realize you are in control of your finances.

  • JOSEPH - Thursday, August 16, 2007, 2:40AM ET  Report Abuse

    • Overall: 5/5

    I BELIEVE WITH THE SUB-PRIME MESS,PEOPLE ARE GOING TO USE THERE CREDIT ANYWAY THEY CAN,CREDIT CARDS ARE THE EASTIEST WAY TO ACRUE MORE DEPT.THIS METHOD WILL HELP THEM

Showing comments 6-35 of 316<< PreviousNext >>

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