Blog | Personal Finance

The Exact Formula for Paying Off Credit Card Debt in 2020

How Robert and Kim Kiyosaki beat lenders at their own game

According to 2016 NerdWallet statistics, the average American household carries $16,061 in credit card debt, and just like many Americans who face seemingly insurmountable bad debt, they too, had major debt after Robert’s velcro-wallet business failed.

Kim explained:

In 1985, Robert and I had a great deal of bad debt. And even though we kept making payments every month we never seemed to make a dent in the amount we owed. Each month we paid a little over the minimum on each one of our credit cards as well as on our car loan. Obviously there had to be a better way to get ourselves out from under our creditors. And sure enough there was.

This is the formula Robert and I followed to pay off our debt. You’ll find that if you follow our formula you will be out of debt much quicker than you imagined. Most people find themselves “bad” debt-free within 5-7 years. The key is to stick with the formula. You will not get ahead if you say I’ll just skip this month, and then two, and then three. If you stick with the formula it then becomes a habit you follow for a lifetime.

While Robert and Kim enjoy tremendous financial success now, they too have experienced their share of tough times. Kim wrote about their steps for getting out of bad debt here.

The method Robert and Kim described is very powerful. In fact, you may be able to slash the amount of time and money it takes to pay off your debt dramatically.

Their debt reduction strategy has several powerful elements, here’s why it works:

1. You keep your total monthly payment fixed.

   This is the first way to beat the card issuers at their own game. In our example, the total monthly payment is $296. As you pay down your debts, the amount your credit card issues will require you to pay will become smaller. But you won’t fall for it. You’ll pay at least $296 each month until all the debts are paid. Just doing that alone cuts the repayment period from 182 years and 1 month down to just under 15 years and saves you over $63,000 in interest. You can put down that Biblical rock.

2. You stop charging.

   If you must have a card for business purposes only, keep it out of the plan. Let your business promptly pay off that card. But for personal purchases don’t use a credit card. You’ve heard the saying: If you’re in a hole, stop digging.

3. You add extra if you can.

   If you can afford an extra $50 a month on our example, you’ll be debt-free in just five years you’ll save over $65,000 in interest. Whew!

4. You target only one debt at a time.

   If you try to do too many things at once you’ll lose focus and won’t get anywhere. If you focus on paying one debt off at a time, you’ll be much more successful. For maximum savings, you should target the highest rate debt first. However, if you’re like Kim and Robert and want to see some fast results, focus on the lowest balance first.

5. You’ll have a plan.

   Research by the Consumer Federation of America and the Bank of America found that people with as little as $10,000 a year in income who reported having a written plan had twice as much money in savings and investments as those without a plan. The same principle applies when you are getting out of debt. Having a written plan can give you that discipline and motivation you need.

Turbocharge Your Debt-Free Plan

The lower your interest rate, the faster you’ll get out of debt. Many people are still trapped in high-rate credit card debt, at interest rates ranging from 19.98% to 29.99% or even higher.

You’ll turbo charge your plan if you also try to get the lowest rates possible. As you start to pay off your credit cards, you should constantly be looking for ways to lower your interest rates.

Talk your way out of debt

Scott Bilker is the author of “Talk Your Way Out of Credit Card Debt.” Scott has made and recorded hundreds of calls with banks in his efforts to lower interest rates for himself, family and friends. In his book, he uses this real-life illustration:

He made 52 phone calls that took 403 minutes (6 hours, 43 minutes) and saved $43,147.68. That’s an average savings of $107.07 per minute. Wouldn’t you like to save over a hundred bucks a minute? Even $100 per hour is good.

Scott has over 50 credit cards and he has paid 0% interest on his balances for the past 15 years. He also has maintained a great credit score, and routinely racks up all kinds of rewards. He’s clearly a credit winner.

If you want your card company to lower your interest rate, you have to ask. They may or may not, but you won’t know unless you try. As my father (and yours too, probably) always said: “It never hurts to ask.” So, go ahead, stand tall and ask for a rate reduction.

Once you’ve created your plan to tackle debt in 2020, take action! For more tips on tackling debt, get my book "ABC of Getting Out of Bad Debt: Turn Bad Debt into Good Debt and Bad Credit into Good Credit".

P.S. Don’t forget to check out Ken McElroys’ new book, "Return to Orchard Canyon".