We’ve all been there. The credit card company provides a credit line increase and immediately you start increasing your spending. Suddenly, you receive a notice that your credit card company is raising your interest rates and lowering your credit limit. Now you realize you must become debt free. But you are stuck because you are paying and paying your credit cards but the amount due is not decreasing.
Today’s hint is how to lower your balances on your credit cards so that they eventually remain at zero.
A friend of mine has five credit cards, with three of them sitting at the credit limit. Each card has a limit of $5,000. I’ve been wondering the best advice to give so that he can become credit card free. About 20 years ago, my cousin who earns his living on the stock market told me about the roll down method. The method involves good record-keeping and the will power to no longer use your credit cards.
The roll down method
The roll down method is quite easy to apply. Determine the amount of money you are paying to each credit card company. Decide if you can add a little bit more. Divide this money up so that the lion’s share of the money goes to the credit card with the lowest balance. As soon as that card is paid then apply the money you were using for that credit card to a second one (plus the initial amount). Keep rolling until the total budget of money is used to pay off the last card.
A roll down example
Let’s use my friend as an example. These are his typical monthly payments:
- Credit Card A: Payment $150
- Credit Card B: Payment $150
- Credit Card C: Payment $150
- Credit Card D: Payment $100 (second to lowest balance)
- Credit Card E: Payment $50 (lowest balance)
Now, my friend is paying $600 per month already to the credit card companies. He’s agreed to pay an extra $50 per month. We’ll start with Credit Card E because it has the lowest balance. His new monthly payment will be $100 until that card is zero. Once paid off, the $100 formerly going to Credit Card E is added to Credit Card D payment – creating a new payment of $200. Once paid off, this $200 is added to the payments for Credit Card A; in which the payment increases to $350 per month until the balance is down to zero. Once credit card A reaches zero then the $350 is added to the $150 he spends monthly on credit card B. The new payment for Credit Card B becomes $500 until that credit card is paid in full. Finally, the $650 all goes to the last credit card until the balance is zero.
How long will this take? The payoff time may be calculated with a roll down calculator.
Start using your own roll down method today. Let me know how well it works – and your target date for becoming debt free!