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Consolidating Credit Card Debt the Smart Way | How I’ll Pay Off $18k in Just Six Months

The average American is in debt up to their knees at any given time, with credit card debt factoring the highest total for unsecured, non-collateral debt. If you are looking to free yourself from the shackles of debt, learn how I will go about consolidating credit card debt in just six months.

According to a CNN Money Magazine article, the average American citizen is in debt at least $15,950 at any given time. That number is nearly right on the money for me, seeing as my wife and I had accumulated about $17,900 in unsecured debt. When we looked at the monthly payments on this debt, they were astronomical, costing us at least $755 per month in minimum payments due to the high interest rate being charged.

Once I had a chance to tally all our debt, the monthly payment and the aggregate interest rate in a spreadsheet, the results were shocking. Our unsecured debt was costing us more than both of our car payments combined! That’s when we decided to take back control. Consolidating credit card debt was not nearly as difficult a prospect as I had imagined. I’ll share my story with you here, so you can have some useful tips on becoming debt-free.

Assessing My Debt

You’ll first want to start by assessing your debt, just like my wife and I did. Use a spreadsheet like Excel or Google to track it all. List your credit card name, current balance, interest rate and minimum monthly payment. Bank Rate offers a fabulous credit card payoff calculator, so you can see how long it will take you to pay off each debt, and how much interest you would pay on that debt in the process of doing so.

Peer-to-Peer Lending

Try to hold your horses on the shell-shock that this spreadsheet gives you; because it is scary when you see how much you are paying each month, and how long it will take you to pay off this debt. Now, look into peer-to-peer lending options. Places like Prosper.com, for example, let you apply for personal loans, including loans for consolidating credit card debt.

Peer-to-peer means that services such as these don’t use the traditional bank format. They instead rely upon angel investors, who are other consumers looking to invest their money in loans. Your credit rating matters, but there is far less red tape. I applied and got approved for a loan for the full amount of my credit card debt, less an initiation fee of $900 (one-time). Now my interest rate is high, at about 17%, but far less than my average credit card, which was about 25%. But keep reading to find out how I will pay this loan off in just six months while slashing the interest rate in half.

Paying Debt Off in Six Months

So my wife and I consolidated our credit card debt using the personal loan we took out for $18,000. The interest rate was 17%. The repayment terms were 36 months at $642 per month. Right off the bat, we had saved $110 in monthly payments and had slashed our interest rate by about eight points, with a fast 36-month window to be debt-free. But wait, it gets better.

We are now paying the minimum monthly payment and then paying $2,500 to the principal each month for the next six months. By that math, we’ll have tendered $15,000 to the principal, over six months, reducing it effectively by about $3,000 per month, when factoring the minimum payment in. Since the principal is the only source of the 17% interest fee, we’ll reduce that by a lot, too.

If you do the math and factor in the principal payments, we’ll have only paid $850 in interest on a six month loan, a far cry from the $12,000 (or more) in interest we would have paid otherwise over the course of 10 years or so. In fact, simple interest on $18,000 over six months, when paid like this, results in about an 8% effective interest rate overall, less than half the actual interest rate.

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