How to Dig Yourself Out of Debt One Paycheck at a Time

If you are digging yourself out of debt one paycheck at a time, consider the impact a single dollar can make in getting you out of debt. If you pay your credit card bills once a month and carry a balance, dig yourself out of debt faster by sending partial payments in each week. You will see a difference in the finance charges within the first month.

Let's assume you have one credit card bill with a balance of $5,000 with a 15% interest rate. If you don't charge any additional money to this account and pay the assumed $100 minimum amount due each month, it will take approximately 79 months (6.6 years!) to pay off this loan. At the end of this loan you will have paid $2,895 in interest charges to use that original $5,000.

Paying just an extra $10 each month ($110 payment) will reduce the term of the loan by an entire year and dig you out of debt by saving you $459 in interest charges.

If you can pay an additional $25 each month ($125 payment), the loan will then be paid off in 2 years less time, and the interest charges would be reduced to $1,974 ($921 less in interest).

We are all accustomed to making payments every month, approximately every 30 days. We have been mindlessly paying our monthly creditors without thinking about the finance charges that are accruing. A bill comes in, we pay it. Stop being reactionary, and be proactive in paying your credit card balances.

Making partial payments
What's obvious is, if you had a little more money, you'd be digging yourself out of debt already. What follows next is a very important but subtle concept. This article isn't just about you sending in more money to your creditors to dig yourself out of debt (although that would be good, too),it's about making partial payments to the credit card companies.

Many credit card companies don't charge processing fees if you send additional payments throughout the month, so why not send partial payments each week or bimonthly?

For example, if you don't have any additional money to send to your creditors than the minimum payment, split up your minimum monthly payment into four weeks. Send in 4 checks of $25 instead of one check for $100 once a month. You will start to see a shift in the amount of finance charges assessed to your account.

If you can send $12 extra each month, split this payment into $3 extra each week, making your auto-weekly payment $28.

Simply go to your online bank account and set up a recurring payment for one quarter of what you pay each month for a credit card bill. If you normally send approximately $100, set up a recurring payment of $25 each week and let the digging yourself out of debt begin. This is costing you nothing extra other than five minutes of your time to set this up.

Every credit card product is different, which is why we often never truly can get a full understanding of them. Interest rates, annual fees, grace periods, etc., for credit card products vary greatly, which is why it's so important to shop around for the lowest rate, the lowest annual fees and the longest grace periods.

For example, some credit cards have a 22-day grace period while others have a 30-day grace period. This grace period is very important if you carry a balance month to month. The 15% interest, from the above example, is calculated on the previous month's daily average balance. If the bank is assessing a 15% fee every grace period, which, in many cases, is less than a full 30 days, interest charges add up quickly.

By splitting minimum payments into partial payments (bimonthly or, preferably, every week), the outstanding balance on the interest charged to the previous cycle will be that much less.

How does a partial payment impact the process of paying down your debt?
Every credit card product is different, which is why we often never truly can get a full understanding of them. Interest rates, annual fees, grace periods, etc., for credit card products vary greatly, which is why it's so important to shop around for the lowest rate, the lowest annual fees and the longest grace periods.

For example, some credit cards have a 22-day grace period while others have a 30-day grace period. This grace period is very important if you carry a balance month to month. The 15% interest, from the above example, is calculated on the previous month's daily average balance. If the bank is assessing a 15% fee every grace period, which, in many cases, is less than a full 30 days, interest charges add up quickly.

By splitting minimum payments into partial payments (bimonthly or, preferably, every week), the outstanding balance on the interest charged to the previous cycle will be that much less.