You’ve heard of the Avalanche and Snowball methods for paying off debt. Both are great processes that have helped millions of people become debt free. Yet, there is something better for credit card debt.
Like many in the queer community, our personal financial problem was debt. For us specifically, it was credit card debt.
By the time we committed to becoming debt free, we had 15 years of combined experience in financial services and knew a little about how money worked despite what our bank accounts showed. We also tried on several occasions, both together and individually, to pay off our debt and learned from those experiences. We knew we could come up with a better strategy for ourselves to become debt free than either traditional method.
And, we did.
We came up with a new method; we call it the Debt Lasso Method, as we share on this Queer Money™ episode. Because the main idea is to pull or lasso your credit card interest rates as close to you, or 0%, as possible, it allows you to use the money you save in interest payments to expedite becoming debt free. It worked for us and has worked for others. One @DebtFreeGuys follower on Twitter shared that she would save about $2250 over 15 months, as well as pay here debt off faster.
What are the Snowball and Avalanche methods?
The Snowball Method, popularized by Dave Ramsey, says to pay off your debt with the smallest balance first while making minimum payments on your other debts. Next, pay off your second smallest balance combining the additional money you were paying your smallest balance card off with and the minimum you would normally send anyway. Continue this until you’re debt free.
This is psychologically gratifying. Even though it will likely take longer to be debt free and cost you more in interest payments, these quick wins are motivating. This made sense to us, but we weren’t that patient.
The Avalanche Method is closer to the Debt Lasso Method in that it encourages paying off your highest interest rate debt first while making minimum payments on other debts. Then, pay your next highest interest rate debt off with the combination of the additional money with which you were paying your higher interest rate card off and the minimum monthly payment you’d normally send. Continue this process until you’re debt free.
Prioritizing your costliest debt first is the fastest way to pay off your debt, in theory, because you’re decreasing the net cost of your debt by paying off the highest debt first. This, too, made sense to us, but we wondered how much faster we could become debt free if we could pay little to no fees maintaining our credit card debt.
Enter the Debt Lasso.
What is the Debt Lasso Method?
The Debt Lasso Method reins in the interest rates on your credit cards as low as possible, even 0%, and pays off whatever debt you carry as fast as possible using the combination of money you save in interest payments and the minimum monthly balance you’d send anyway. This is how we paid off $51,000 in under three years.
We first contacted all our credit card companies and asked them to lower our interest rates. Surprisingly, most companies obliged even if it took some explaining. It helped that despite having all that debt, we rarely missed or were late on payments. The only thing holding us down our credit scores were our debt to income ratios. This savings helped us to start saving money immediately, as all savings immediately went towards our credit card debt.
Next, we looked for 0% interest-rate-credit-card-promotions with no annual fees. When we found a credit card and promotion that suited us, we calculated the cost of a balance transfer to that card. This required reading a lot of fine print to be clear what we might get with each offer. The same will be required of you.
At the time, 3% balance transfer fees were standard. There were a few that charged less than 3% and even some that charged 0%. Of course, the 0% interest rate credit card promotions with no annual fees and 0% balance transfer fees were gold. Some even exist today.
Most of the 0% interest-rate-credit-card-promotions lasted between six to 18 months. The longer the promotion, the more time we had to pay off our debt. We used this time to diligently pay off as much credit card debt as we could as fast as we could. When one card was paid off, we put even more money toward our remaining credit card debt. We continued this until we were debt free.
To see if the Debt Lasso is right for you, download our money-saving Credit Card Comparison Payoff Calculator here.
What are the 6 steps of the Debt Lasso Method?
1. Contact all your credit card companies and ask them to lower your interest rates
2. Find low to 0% interest-rate-credit-card-promotions with no annual fees
3. Read the fine print
4. Crunch the numbers using the Credit Card Comparison Calculator
5. Do a balance transfer when it’s financially advantageous to your unique situation
6. Put your normal credit card payment, any additional money and the money you used to pay your credit card interest all towards your debt
What are the risks of the Debt Lasso Method?
With all our years in financial services, we know everything requires a disclosure. Here’s the Debt Lasso disclosure. Be clear about what happens if you miss or are late on payments toward your low to 0% interest-rate-credit-card-promotions, what could cause you to no longer qualify for the promotion and what the credit card interest rate will be once the promotion ends.
Know that opening and closing credit cards regularly will cause your credit score to drop. To minimize this, we kept our credit cards with the longest histories open with $0 balances even while we opened and closed our low to 0% interest-rate-credit-cards. This helped our credit scores to not drop as much they otherwise would have.
Also, confirm that all transfers are right for you with our Credit Card Comparison Payoff Calculator. Finally, understand that no method, Snowball, Avalanche or Debt Lasso will help you become and stay debt free unless you’ve made the mental shift and commitment to be debt free.