When I sat down and took a hard look at the debt I was facing, I wondered to myself if there was an optimal way to pay off all my loans and credit cards. It was not enough throwing every last cent I had to pay everything off in its entirety as the interest charges that were being added to my principal was not helping me eliminate my debt faster. At one point, my $9,000 balance on my Mastercard at more than 18.5% APR was charging me almost $200 as minimum payment. More than 3/4 of that payment was to cover interest only!

I immediately go to my local bank for a consultation to see how they can help me. I was looking to consolidate my debt at possibly a lower interest rate. That way I thought, there will only be one payment made every month and it will be easier to keep track of my progress. Now the lady I had my appointment with wasn’t very helpful. She advised that with my current credit rating, job history, and credit history, the best I can hope for was a personal loan at 12.5% and the chances of getting this was very slim. I politely declined and walked away. Most of the interest rates I had for most of my loans were far below 12.5%.

In comes MBNA in my life and I was saved. I was browsing around a popular forum, RedFlagDeals, and found out about a 0% balance transfer promotion when you open a Platinum Plus Mastercard. Being the Money Monkey that I am, I applied online, and followed up on the phone a week after. The approval process was quick and painless and upon approval, the balance transfer was setup over the phone. I had it deposited to my chequing account and used it to pay off one of my higher interest loans (the Mastercard was already paid off at the time I applied for the MBNA card).

What’s the catch?

• The 0% interest rate only applies to balance transfers made in the first month or two
• The 0% interest rate is only in effect for one year starting on the day the card was approved
• There is a balance transfer fee between 1% and 2% of the total amount transferred but the folks at MBNA were able to cut it down to half of that if you ask politely (this was last year, October 2008, so things might have changed)

Now these guys at MBNA are not crazy. They are banking on the fact that most people are not diligent enough to pay the balance off by the time the promotion is due. After a year from approval, the interest kicks in at 18% up to 24% on the entire balance!

Who do you recommend this for?

• Newly grads with high levels of debt from school (assuming these grads have income to pay off the balance by the time the promotion ends)
• Investors
• Anyone who can and will pay off the debt before the promotion ends (use the money to purchase big-ticket items, or earn a return > 1% for one year)

Who is this not for?

• Anyone else who wants the money but can not foresee having enough cash to pay it off before it’s due will be eaten alive by the high interest rate – do not fall in to the trap!

In my case, I used the$10,000 to pay off some loans and as I save up money from my primary income to accumulate $10,000 by the due date (which is this November), I put the funds into an ING savings account that earns me money while it’s parked. I have calculated the total interest saved and total interest earned by using this 0% promotion to be almost $900 for the year. Not too shabby!

In my previous post, I mentioned a common debt reduction strategy called the debt-snowball. The main idea is to throw every last cent you have to pay off the lowest balance account while paying off the minimums due for the rest. As accounts are being paid off, more money will be available to aggressively snowball payments and accelerate debt reduction.

Here’s a very useful tool that anyone can use to keep track of their debts and keep track of each payment period, snowball amounts, and time left to eliminate all debt. You can even choose a payment policy to pay either the lowest balances first, highest interest first, or define your own custom order. Download this tool from Vertex42.

I started real life out with $45,000 in debt and now, I’m down to less than half of that in just a little over a year. How did I do it? It’s called actively attacking debt and employing a debt repayment strategy commonly known as the debt-snowball.

According to Wikipedia:

The debt-snowball method of debt repayment is a form of debt management that is most often applied to repaying revolving credit — such as credit cards. Under the method, extra cash is dedicated to paying debts with the smallest amount owed.

Methodology

1. Write down all the debt you owe, be it revolving credit or personal loans
2. Don’t forget to write down the balance owed and effective annual interest rate (EAR)
3. Always pay the minimum amounts due for all debts
4. Set a maximum amount of cash you can devote to service debt every month
5. After paying all the minimum amounts, determine how much money is left over
6. Use the extra money to pay off the account with the lowest balance account first
7. Another method is to pay off the account with the highest interest (EAR) first but for some people, seeing accounts being paid off is more motivating (technically, you save more money paying off high interest accounts first)
8. Once the account has been completely paid off, use the extra money used to pay that account and its old minimum payment to pay off the next highest balance or highest interest account
9. Rinse and repeat until all debts have been eliminated

In my case for example, I had the following debt with the following interest rates:

• TD Student Line of Credit – ($8,000) @ 8.00% variable
• OSAP Student Loan – ($12,000) @ 6.50% variable
• TD Secured Auto Loan – ($16,000) @5.65% fixed
• Citi Mastercard - ($9,000) @ 18.50% fixed

Now I chose to attack the highest interest account first so I paid all the minimum amounts due and funneled all the extra money to paying off the Mastercard. The Mastercard account has now been completely paid off and theoretically, all the extra money + the Mastercard minimum payment should now be applied against the TD Student Line of Credit at 8.00%.  Rinse and repeat until all debts have been paid off. This method is very simple and extremely motivating as you can keep track of closing each account as a milestone towards a debt-free life.

So this is my first post on The Money Monkey! Cheers to a brand new theme (courtesy of squarefour), a brand new domain, and a brand new bookmark for all of you readers to add to your favorites.

First and foremost, The Money Monkey welcomes you. I’d like to use this first post to give my readers a snapshot of my financial position last year when I finally graduated and received my undergraduate degree, so you all can see my undocumented progress from back then to where I am today.

School is expensive. However, I was very fortunate to have attended the University of Waterloo because of their internship or co-op program. What that meant was I was able to secure placements and earn money during co-op terms to supplement the high costs of living away from home, tuition fees, and other school related miscellaneous. At the same time, I earned invaluable work experience that I was able to leverage and add to my resume to secure a job right after graduation. Now enough of the school talk as it makes some people miserable. Show me the finances!

Okay, now it’s not as bad as some people may have exiting university in terms of debt load but I exited school with more than $45,000 in debt. Let me outline where that $45,000 in debt came from, as it’s not all related to school. Here are rounded approximations:

• TD Student Line of Credit – ($8,000)
• OSAP Student Loan – ($12,000)
• TD Secured Auto Loan – ($16,000)
• Citi Mastercard - ($9,000)

That’s a whole lot of money! A lot of it is also what we  consider “bad debt”. Hint: It’s the one that starts with an “M” and ends with “astercard”. So that’s the whole picture. Now I realized after school and getting my first job that I feel restricted – almost trapped – by this almost unsurmountable amount of debt. In my next post, I will detail my action plan to get rid of it and start building positive net worth. Now I’m not even at $0 net worth yet, but I’m getting there. I’m actually reaching my next milestone in less than two months so that is definitely something to look forward to.