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Strategies To Slash Your Debt

In the 1999 book Slash Your Debt, personal finance authors Geri Detweiler, Marc Eisenson, and Nancy Castleman describe the high cost of revolving debt and a variety of methods available to reduce the cost of outstanding credit balances. Specific topics of chapters include increasing credit card minimum payments, debt consolidation loans, home equity loans, family loans, borrowing from tax-deferred retirement plans and insurance policies, and mortgage prepayment and refinancing.

After each strategy (e.g., debt consolidation) is discussed, a summary table titled "How Much You Can Save" indicates the dollar amount that could be saved on $5,000, $10,000, and $15,000 credit card balances charging 17% interest. The tables were generated using Eisenson's popular Banker's Secret loan calculation software.

For example, if consumers transfer a $5,000 balance on a 17% credit card to a low-rate card with a 5.9% "teaser rate," and pay it off in five years, they'd save $10,518 (note: this would involve periodically "surfing" for new low-rate cards). If the balance were transferred instead to a 14% personal loan and repaid in five years, $9,324 would be saved. Transfer a $15,000 balance from a 17% credit card to a five-year 14% loan and a 5.9% credit card and the savings are magnified: $29,649 and $33,232, respectively.

Below is some additional information from this useful reference book:

• The lower the minimum payments on a credit card, the higher the cost to borrow over the long run. Even fractions of one percent make a big difference. For example, a $5,000 balance on a 17% credit card with a minimum payment of 3% of the outstanding balance would cost $4,296 in interest and take 18 years to repay. Lower the minimum to 2% and the interest cost jumps to $11,304, with 40 years needed to erase the debt. A 2.5% minimum payment would cost $6,210 in interest and take 24 years to repay.
• A low-rate credit card with a low monthly minimum payment can actually cost more than a higher-interest rate card with a higher minimum payment. For example, a $5,000 balance on a 19.8% card with a 3% minimum payment (i.e., 3% of the outstanding balance) would cost $5,858 and take 21 years to repay. Despite the high interest rate, this actually compares much more favorably to $9,159 and 35 years for a 15.9% card with a 2% monthly minimum and $9,538 and 41 years for a 13.5% card with a 1.667% minimum.
• Like home mortgages, debt that takes decades to repay will cost 2 to 3 times (or more) the amount borrowed. An example is given of a $10,000 balance on a 17% rate credit card with a 2% minimum payment. If this balance is not switched to a lower-rate loan, the amount repaid, after 50 years, will be $33,447 (($23,447 in interest), or more than three times the amount borrowed. Consolidate the debt over five years with an 11% loan or credit card and you'll save $20,402. The book periodically warns readers that large dollar figures like this are not a typo. When high-cost and/or long-term debt is accelerated, borrowers will save more than they borrowed.
• Even small amounts added to minimum payments produce awesome results. For example, send $25 a month more on a 17%, $10,000 credit card balance and you'll save $11,662 in interest and 397 monthly payments (that's 33 years!). An extra $50 per month will save $15,211 and 468 payments. Even what the authors call "pee-wee pre-payments" matter. For example 25 cents a day toward that $10,000, 17% balance will save $5,970 and 20 years of payments. Even 10 cents a day will save $3,060 and accelerate repayment by 12 years.