Change of Plans to Fortify Finances Via Debt Elimination

Earlier this week, I my line of credit cut me off on any more draws. All I can do is pay down my balance. I had been using the line of credit for "velocity banking" to pay down credit cards. My family has been fortunate in that we have remai...

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Earlier this week, I my line of credit cut me off on any more draws. All I can do is pay down my balance. I had been using the line of credit for "velocity banking" to pay down credit cards. My family has been fortunate in that we have remained employed. Thus, the stimulus payment and student loan pause have helped us make a significant dent in our credit card debt. By September, I expect that we ought to have cleared the decks. However, there are a couple of outstanding debts that are more difficult to tackle.

Clearing out the credit cards is helpful in two ways. First, low utilization on your revolving credit is helpful for your credit score. Second, there is significant interest savings by having empty credit cards. Third, it frees up cash to pay down installment debt.

Installment debt, I have learned, is the worst. It is very seductive with its monthly payments and low interest. However, the volume of interest often makes installment loans cost double what you would have paid if you just ponied up cash. Another reason why amortized loans are bad is that it doesn't matter how much you pay off, the monthly payment remains the same. With a credit card, you can pay off half, for exameple. Then your minimum payment will also go down. Therefore, paying off installment loans quicker does not help cash flow until the entire thing is paid off. You do realize interest savings. However, you still end up shelling out the same monthly payment until the end.

Velocity banking requires taking a draw out of your credit line to pay off XYZ. Then you dump your paycheck in the line of credit to reduce your average daily balance. This lowers your interest cost. Then, as expenses come up, you draw money out of the line of credit. This method speeds up paying off other debts. Now that is not available to me anymore.

It is possible to do something similar with credit card balance transfers. However, I have enough cashflow now that I can dump large payments into the outstanding credit cards. Once these are paid off, I'll turn my sights on an installment loan, which I can fortunately pay with a credit card or debit card. I plan to use my Crypto.com debit card to pay that off and get 3% cash back in MCO. Then, we'll turn around and pay off my wife's car.

This is all long-term. The pandemic has been helpful with the cash infusion and reduce costs. With my wife and family staying home, we spend less on restaurants, auto fuel, and entertainment. It's far less expensive to buy movies online than go to the theater. On top of all that, my wife has received a modest pay raise. The pandemic has been good for us in that it has allowed us to adjust our lifestyle to get our spending under control.

One hard lesson that I have acquired, personally, is to not have authorized users on credit cards. I got stuck with the bill on a couple of AMEX cards, which has banged up my credit rather hard. Also, between the Mrs. and I, it is difficult to keep to a budget when we are both dumping money on the same card. Fortunately, she got approved for a Walmart card and is enjoying 5% cash back at the moment. I think that will be her daily driver.

Circling back to the line of credit, I have enough free cash flow now to make large payments to the credit cards before circling back to pay off the line of credit and other installment loans. Our budget also allows for setting money aside for "savings", which consists of interest-paying crypto. We just have to keep it steady.

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