So as many of you know a few weeks ago my husband and I sold everything we owned to travel full time and pursue digital Nomad life.
So far its been mostly getting our temporary space set up at his Grandparents house and working on well… work! Like writing this blog and researching digital contractor jobs etc. But before we could do this we had to overcome an obstacle that many of us face… Credit card debt.
Prior to this … let us call it a life change… we decided to make a big push to eliminate our credit card debt. We actually tried to do this for like a year. … this was hard. No lie. We had about 25K in credit card debt. In and of it’s self on a month to month basis this was no big deal. We both had great jobs and made a very comfortable living with money left over every month for savings and fun stuff. But knowing we wanted to hit the open road and that paid work would unpredictable we decided to make getting rid of the credit card debt a priority.
First let me set the expectation- there’s different kinds of debt. For the purpose of this blog we will call it good debt and bad debt. Good and bad in this case are relative to your personal financial goals.
For us, and for the purpose of this post the “Good” debt consisted of Mortgage, and student loans. The reason I classify these as “Good” is because these types of loans create returns or equity. My husband’s student loans are for his schooling. Our Mortgage builds equity, and we can write off BOTH of those expenses for increased tax refunds at the end of each year. These types of debt will ultimately result in one building more wealth over time.
Bad debt would be things such as revolving debt or credit cards/ accounts.
Revolving debt is debt with no set pay out date, as long as you make payments and have remaining credit you can use revolving debt, and also rack up a lot of borrowed money in the mean time. There are situations where revolving debt becomes necessary, in fact, for my international readers, in the US it’s almost impossible to build good credit without revolving debt. As the US credit bureaus almost always require some type of revolving debt or credit card in order to list you as a “good” risk for banks. These bureaus assign a score to each person based on their overall debt to income ratio and their card payments history as well as things such as balances on those cards.
Now I will also state that I STILL use our credit cards as we have miles points and we try to build up miles for free travel (and if you want to travel you really need a miles card). HOWEVER I ALWAYS PAY THEM OFF AT THE END OF THE MONTH.
Anyway- back to how we paid these off. First and foremost we took a step back on our spending. There was less eating out, shopping at budget grocery stores, didn’t buy new clothes for like 6 months (which is hard for me!) We used Mint to track where we were spending and see what we could eliminate. Then we set budgets for those items and DIDN’T go over them. Additionally I started working 4-5 hours of overtime each week or more. These extra hours were not extra long days or anything. I just took shorter lunches and instead of standing in the cafe when I arrived at work 10-15 minutes early I clocked in at my desk and started answering emails. That added an additional $500/ month to our income! Also- since we were selling the house I had a couple of yard sales and sold a lot of items on craigslist which accounted for probably $1000 worth in additional funds, and it helped me clear out all the excess crap we had sitting around!
We took ALLLL the extra money, and about $3K from our savings and we paid off TWO cards. In the amount of about $8K total in less than two months. Then we set our sights on the bigger cards. We looked at our interest and realized the interest was what was killing us. Despite having excellent credit (above 750 score) we had high interest on our cards. I imagine this interest is pretty standard for folks our age. But I knew 24% interest each month would mean we’d be paying these down for ages before we made a dent.
SOOOO we decided to take out an unsecured personal loan. Personal loans fall under the category of what I like to call “Good-ish” debt. In that they’re not awesome, but they are a lot better than revolving debt. For whatever reason the credit bureaus see this type of debt as basically harmless. And while it counts toward your overall debt to income ratio its considered low risk and if you stay on top of your payments actually makes you look great to lenders because it shows them that you can handle a regular monthly payment.
Overall though this type of loan has MUCH lower interest. We were able to take our interest rates on our existing debt down from 24% – 9% and save almost $200 a month in payments! When we sold the house we paid off another card in cash and converted the rest to the personal loan. Then we took a chunk of the money from the sale of the house and put enough in an account to pay for the loan for the next 6 months. This way it’s not something I even have to worry about. It just pulls straight from the account.
So now I don’t worry about credit card payments except for what I spend each month (which right now is virtually nothing!) and I have saved several thousands of dollars.
Some tips if you’re thinking what we have done sounds like the right plan for you. Try and go for smaller banks for personal loans, they often have better rates. We went with First Tech federal credit union because we liked that the loans had no pre-payment penalties and no excessive fee’s. Be sure you read the fine print. Additionally we only borrowed what we owed on our credit cards. This is important because it’s easy to say oh lets just round 17K up to 20K… but it’s just as easy to spend 20K and owe a lot more. Finally, be sure to apply for these loans BEFORE you start your adventures while you’re still working. This will increase your chances of approval and make it easier for you to start paying it down!
I hope this information has been helpful for you! I would also love to hear your story about debt consolidation/ elimination. I would also love to answer any questions or go into greater detail for anyone interested!