DON’T TAKE OUT THAT LOAN
If you are anything like me, you are inundated with snail mail and email offers from people wanting to give you money. Often at ridiculously low interest rates. Before you say, “I could use the money,” consider the following:
How much do you owe on your credit cards? What is you credit score? Could you pay off the loan without jeopardizing one of your credit card payments?
If you can’t answer these questions with a clear conscious, “Don’t Take Out That Loan.”
Instead, work on reducing your credit card debt. How? You say. You are considering a new loan because your cash flow is poor. How can you pay off those credit cards, and why? Why? Because reducing those credit card debts will increase your credit score. Plus, your cash flow. Maybe even negate the need for another loan!
To paraphrase Van K. Tharp’s great 2004 book, “Safe Strategies for Financial Freedom,” written in conjunction with D.R. Barton, Jr., and Steve Sjuggerud:
To reduce or eliminate your monthly recurring debt servicing payments, you must first prioritize your payments. To do this, first, make five columns on a legal pad. (You can do this in Microsoft Excel. I learned spread sheet calculations in Lotus 1-2-3. I don’t do Excel. Therefore, I use pen and paper.) In the first column, list all your debts, including your home mortgage(s), car payments, credit cards, appliances, etc. In the second column, list the balance owed on each debt. In the next, or third column, list the minimum payment for each debt. You are probably already paying this on you mortgage, car, and appliance debts. In the next column you have to work a little. I recommend using a calculator. This column is headed Months to Pay Off. To arrive at the figures in this column, you divide the numbers in Column 2, The Balance Owed by the numbers in Column 3, Minimum Payment. The next column is your Payoff Priority. You prioritize you debts by the number of months left to pay it off. The debt with the fewest months left is Priority 1, the next fewest months left is Priority 2, and so on.
Now, go back to Column 3, your Monthly Minimum Payment column and add up the numbers. This is your monthly minimum debt servicing total. Add 10 percent to this total. Can you afford to pay 10 percent more to your total monthly minimum debt servicing total? You are probably already doing it. You add this number to the minimum monthly payment for your Priority 1 debt. This will pay this debt off early. Take the next month off and celebrate. Make the minimum payments to your remaining debts. Take the money you were paying on your Priority 1 debt and buy a good bottle of Scotch or take your sweetie out to a good restaurant.
The next month, you attack your Priority 2 debt. You do this by adding what you had been paying on your Priority 1 debt (the minimum monthly payment plus 10 percent of your total minimum monthly payments) to the minimum monthly payment for the Priority 2 debt. You keep doing this faithfully until you are debt free.
Now, you can take out that loan. Your credit score will be at its highest, so your loan interest rate will be the lowest offered at that time.
One word of caution! This only works if you don’t use your credit cards or add to your other debts. If you do use your credit cards, (and I don’t see how you can help it. It is not safe to carry around large sums of cash. And some establishments don’t accept checks or debit cards) you have to add the monthly usage to the minimum monthly payment. If you go hog wild some month, you are probably going to bounce a check that monthor have to do the above exercise all over again.