About 12 years ago, my husband and I found ourselves sitting on our dining room floor with its Berber carpet in our cold, dark basement apartment. We were sad and depressed. This was the night we finally admitted to ourselves that our lives weren’t going as planned, and certainly not as we dreamed after graduating college eight years prior.
We had $51,000 worth of credit card debt between the two of us. If we had $51,000 in cash, we could’ve put 20% down on a $255,000 house and not lived below ground. Or we could’ve bought a nice car; we paid about $10,000 a year in interest payments servicing that debt. That’s the price of a few nice vacations a year.
We were two thirty-something financial services professionals living in a rented basement apartment that was so dark you couldn’t tell what time of day it was without looking at a clock. It was at that moment, sitting on that floor, that we made the commitment to become debt free. No longer would we ignore our financial situation. No longer would we accept partial success. It was "Debt Free or Bust" for us.
After we made this commitment we researched the best strategy to pay off our credit card debt as fast as possible. The Avalanche Method and the Snowball Method have worked well for a countless number of people and may be good for paying off other forms of debt, but we came up with our own method: the Debt Lasso Method.
Avalanche and snowball methods
The Avalanche Method said to focus on the debt that cost us the most. We would pay off our highest interest rate debt first while making minimum payments on our other debts, then proceed to our next highest interest rate debt and continue until all our debt was paid off. In theory, prioritizing our costliest debt first would be the fastest way for us to pay off our debt and save us the most money.
The Snowball Method, popularized by Dave Ramsey, told us to pay off our debt with the smallest balances first while making minimum payments on our other debts. Once our smaller balances were paid off, we’d proceed to the second smallest debt and so forth until we were debt free. The idea with this method was more psychological in that we’d score little wins quickly. Even though it might have taken longer and cost more, these wins would motivate us to achieve our ultimate goal.
We saw value in both methods. From their experiences, some friends and family recommended the Avalanche Method and others recommended the Snowball Method.
We were already all in on our goal of being debt free, so we didn’t need the psychological strategy of the Snowball Method to stay engaged. And even though the Avalanche Method seemed to be the fastest method to pay off our debt, it still didn’t seem fast enough.
The Debt Lasso Method
The Debt Lasso Method includes first lowering our current credit card interest rates as low as possible, ideally to 0%. Negotiating a lower interest rate on existing credit cards is possible, but getting a credit card company to agree to a 0% interest rate on an existing card is challenging. That’s why the second step in the Debt Lasso Method is finding and taking advantage of 0% interest rate credit card promotions.
Therefore, 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 to hold down our credit scores were our debt to income ratios.
It also helped that we explained how dire our situation was and that we didn’t want to miss or be late on future payments or file for bankruptcy. Therefore, it was in everyone’s best interest to accommodate our requests.
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. It required reading a lot of fine print to be clear what we were getting.
Most 0% interest rate credit card promotions last between six and 18 months. We chose the promotions with the longest terms to reduce our total cost in balance transfer fees and give us more time to pay off our debt. Then, we diligently paid off as much debt as we could as fast as we could. When one card was paid off, we put more money towards our remaining debt. We continued this strategy until all our debt was paid off.
The fine print of the Debt Lasso Method
There are two concerns to keep in mind when implementing the Debt Lasso Method.
The first is to read the fine print of the credit cards and promotions you consider. Understand what happens if you miss or are late on a payment, what could cause you to no longer qualify for the promotion and, especially, what the credit card interest rate will be after the promotion ends. In all cases, it’s likely that the credit card interest rate either returns to a normal or high-interest rate.
The second concern is that opening and closing credit cards regularly will cause your credit score to drop. We both kept our credit cards with the longest histories open with $0 balances even while we opened and closed our 0% interest rate credit cards. This prevented our credit scores from dropping as low as they would if we closed our accounts with the longest histories, and had a positive impact on our debt to credit ratio, which also helped our credit score.
If you’ve gone all in to become debt free and are looking for the best debt payment method to pay off your credit card debt, the Debt Lasso Method may work for you if you’re willing to put in some upfront work. If you find that the Avalanche Method or the Snowball Method is better for you, that’s great. The goal is to become debt free. Whatever method helps you achieve that is the method for you.