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Paycheck Chronicles

The Three A's of Debt Elimination

For a lot of folks, January brings a new commitment to eliminating debt. And if the numbers are any indicator, it’s warranted.

Last summer, the Federal Reserve reported that Americans owed more than a trillion dollars in revolving debt – what most of us know as credit card debt. That’s double the amount we carried 20 years ago.

I don’t have the definitive answer on how to turn the tide on this ever-growing wave of credit card debt, but I can offer an approach that might help. During an employee podcast, I spoke with one of USAA’s financial advice directors, Mikel Van Cleve, who talked about a concept for knocking out debt. He calls it “the 3 As.” While the tactics aren’t new, I thought his packaging was novel. Let’s take a closer look.

Assess

The first step to getting out of debt is to face the music and determine how far you are in debt. No hiding or conveniently “forgetting.” Get it all out in the open by creating a comprehensive list of what you owe, required payments and interest rates. These factors will play a key role in developing your game plan to put this menace in your rearview mirror or, more emphatically, to squash it under your tires. During this phase, you also scour your spending to identify opportunities to cut back or cut out and free up cash to direct towards your debt.

Avoid

If every step of your debt elimination journey is accompanied by two, three or four steps back, things will not go well. You must avoid using your credit cards if you expect to make progress. Obviously, this is easier said than done. So, try these tips help yourself out:

If you have several credit cards in your wallet, remove all but one and then put a piece of red tape on that remaining card to remind you it’s for emergencies only. Removing the tape before swiping or reading the numbers on the card could cause just enough of a delay to allow you to forego the transaction.

Set a goal to sock away at least $1,000 in a savings account. That way, if you have an unexpected expense, you can tap your cash stash rather than your credit card.

Freeze your cards in a bowl of water – no joke! Better yet, chop them up with scissors or shred them (all except one!). in other words, don’t use them. Remember, once you’ve paid off a card, you don’t necessarily want to cancel or close it — this could negatively affect your credit score.

Attack

Here, you turn good intentions and a plan into results. The way you go about tackling credit card debt is semi-controversial. Some experts say you should pay off credit cards with the highest interest rate first. Others believe you should start with the card that has the lowest balance so that you create momentum by knocking out the lowest balance card quickly. At USAA, our view is to save on interest. But we also recognize not everyone is motivated in the same way. So, choose an approach that works for you and will achieve your goal.

 There you have it. Now you’ve got an easy-to-remember approach to reverse the trend on your revolving debt – one A at a time.

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