Day 43: A little confused about Average Daily Balance

Does anybody know how Average Daily Balance works, as far as calculating interest? I'll tell you why.

I'm looking at my Best Buy cards, the ones that I'm working to pay off before we get charged any interest on the purchases. Today, I happened to notice where they are calculating the interest on the credit card site itself, not the pdf format of my statement.

Basically, it looks like they're still assessing interest based on the original purchase price and not the current balance. For example, one purchase currently has an outstanding balance of $1946.91. On the website, the average daily balance for this purchase is showing as $2878.31 for this same purchase. All of the purchases are like that; one balance on the statement, another on the website, and the statement itself doesn't show the average daily balance being used to calculate interest. Is this right? Is it normal for there to be a nearly $1000 difference between the balance on a purchase and the average daily balance for interest calculations?

If they're assessing the accrued interest based on inflated numbers, we'll definitely be sure not to pay Best Buy any interest.

Anyway, all of our balances went up this month, except for Best Buy. Our anniversary ended up costing us nearly $200 between dinner, movie, popcorn, etc. I also have a collection agency contacting me about a medical bill from four years ago. I'm going to see if the hospital can call it back from the collection agency so I can use my Health Savings Card. I don't think I'll be able to use my card for a collection agency. I fully intend to pay it, I just have to figure out how.

Day 34:Restructure?

I've been looking the past couple of days and I may need to change our debt payoff strategy. I was adding up our bills, all of our bills, and realizing that we just don't have enough money to go around. There are probably things we could cut, like cable (currently runs us $163.25 per month) and if my husband would ever quit smoking, it would save us over $300 a month. We can't change our phone plan because we just signed a new two year contract; besides, three iPhones on an unlimited data plan and two regular phones without a data plan is actually a pretty good deal at $210 a month. It would cost more to break the contract than we'd save in fees. We've been trying to grocery shop more often to spend less in one trip and throw away less perishable goods, but it's hard for me to shop for one week, or two weeks, when I'm used to shopping for three or four. I also signed up for our electric companies budget plan so our bill remains pretty stable. So far, it's only fluctuated $2-$3 per month, and we're accruing a credit to apply towards our winter heating bill this year. It's easier to be on the payment plan than pay $125 during the summer and $300 during the winter.

I was also considering moving payments around. Currently I'm paying $200 on one Best Buy card and $225 on the other. These values were based on what it's going to cost to pay off "No interest" purchases by the maturity date. The thing is, I didn't take into account that these purchases expire at different times, and HSBC applies payments first to the minimum payment due on each individual purchase, then any purchase that isn't on a payment plan, and then on the no interest payment that expires first, so even though our largest purchase expires in December 2011 and accounts for 34% of my estimated payment, 100% of that payment is going towards our smallest purchase. I think it will make more sense to include a picture of what I mean.

The above chart is a representation of our current purchases on our Best Buy cards. The items highlighted in the red color are on one card, the one we're currently paying $225 on. The items highlighted in purple are on another card, the one we currently pay $200 on. I've been considering paying less on the Best Buy cards, once I have the item expiring in December paid off, and applying the extra payments to our Target credit card, which has the earliest balance. By playing with a debt snowball calculator, it appears that going this route would not only pay off all three cards earlier, but save us over $800 in interest. My only concern is that if we don't get our tax return on time, we'll end up paying interest on the purchase that expires in March.

None of this matters though, if we can't stop using our credit cards and eliminate something somewhere. We're struggling with this right now, because we're just having a hard time sticking to our budget over the weekends, which means we end up having to use credit cards to cover a necessity, or we're short on mortgage. I wish I could point to one thing that's contributing to our downfall, but it's all of us. This past weekend we ate out four times, easy $100. This coming weekend is our anniversary and between dinner and a movie, we're looking at another $100. I know we'll get there, just right now we're struggling.

Day 29: This Months Picture

So, we've made payments on all of our debts for the month, so here is the synopsis of this week.

We didn't pay as much off of our Best Buy #2 card as expected because my husband made a purchase on it, but otherwise things are moving along the way they're supposed to be.

Our total credit card debt is below $20,000! Small victories.

Day 23: Does Every Little Bit Count?

We haven't used our credit cards in 23 days, aside from my husband buying a new satellite radio. It was more than I expected, but it is one of those things that I went along with because he "needs" it for work. It will be paid off on Thursday when I pay towards our Best Buy cards anyway. It pushed our payoff date back by a month, but it was just one of those things. Aside from that, we've been paying cash for the little things that we were using credit cards for.

I had been stopping at McDonalds for breakfast every day on my way to work, for the past week I've been taking dry cereal and only stopping for a pop. For the cost of one day's breakfast from McDonalds, I've eaten all week and will next week too. I stopped at The Container Store yesterday and bought one of those cups that you put the milk in the bottom half and cereal in the top half and then mix them when you're ready to eat. There were a couple of other things I would have liked to buy, but I'll wait until I have a gift card, or something.

I've been taking surveys online on several sites, just to see if they even resulted in anything. So far, nothing. I've earned points and dollars on a couple of sites, but not qualified for a lot of surveys. I haven't made enough to cash out on any of them, but I figured if I take enough and earn some gift cards, then it can help towards my little shopping excursions.

Next week, I'll make payments towards our Best Buy credit cards and our Target card, and then I should be able to update our debt totals for this month. I think it'll help to see a difference in our balances, going the right direction. It might help to motivate us to keep it up. I've been questioning whether I should be making large payments towards the two different Best Buy cards, or whether I should pay off one and then the other, but I guess ultimately, it doesn't matter.

Day 19: Changing Your Mind

I read and article this morning referencing 10 sings that you're headed for a debt disaster .

1. Your bank account is consistently overdrawn.
2. Your credit card balances are rising.
3. You're only making minimum payments on your credit cards.
4. You and your partner are arguing about money.
5. Your savings account is busted.
6. You're juggling your monthly bill payments.
7. You don't know how much you owe.
8. You're keeping secrets.
9. You've got a credit card collection.
10. You're near the limit on your credit cards.

I meet eight of the ten signs, or met eight of the ten before starting our debt payoff process. Our credit card balances were rising (not anymore), we are making the minimum payments on all but two of our credit cards, we argue about money, our saving accounts are busted, we're juggling monthly bill payments (although not to the extent in the article, we now know how much we owe, we've got a credit card collection, and we're near the limits on most of our credit cards.

Reading that article led me to an article about Debt Relief Firms and how they put debtors in a deeper financial hole. I don't use debt relief programs, and in most instances, I don't like debt relief programs. After reading the article in the New York Times, I like them even less.

In the interest of full disclosure, I have to tell you that I briefly (two weeks) worked at Consumer Credit Counseling Service. CCCS is different than the debt relief programs that this article talks about in that they negotiate lower interest rates and payments on your debts, collect your payment from you, and distribute it to your creditors according to your established payoff plan. There is no saving until you have enough to negotiate with your creditors before payments are made. Consumer Credit Counseling Service is a non-profit credit counseling agency. They have counselors in their office and you come in and meet with them in person. They have low fees ($25 set up and $25 per month) but do have a process to waive these fees if you're in a financial hardship situation.

A quick search for their website shows me that they're now known as Apprisen Financial Advocates. Again, I used to work for this company, but I have no personal interest in their success or failure at this point, as I have not worked there in over ten years and have no affiliation with them.

I have not personally considered working with this company. Why? While I feel that they can be beneficial for individuals who have a hard time juggling their monthly debt payments and budgeting their monthly expenses, I believe that if you are motivated, dedicated, and educated, you can pay your debts off yourself without costing $25 a month in account service fees. The problem is that many people with massive debt, such as myself, are in that position because they couldn't stop themselves from using credit in the first place. If you can't change the root cause of your financial problems, you are doomed to repeat them.

Just this past week or two, my husband and I were discussing taking a vacation to Florida. My mom, sister, and niece are going next month. We went last year and took them with us, and we both wanted to go again this year. Even with our credit cards maxed out and working to pay the balances off, I have been trying for weeks to come up with a way to afford this vacation. To me, it didn't matter that we're sitting on $20,000 in credit card debt, or that we're trying to pay those balances off, or we're a flat tire away from being broke; all I wanted was to go on vacation, however I could make it happen. I was even considering applying for another credit card just so we could go. Logic finally kicked in this morning and I realized that this need for instant gratification is what got us in this position in the first place.

My husband, while apologizing for us not being able to go on vacation this year, said that maybe starting now, we put $50 a paycheck into a savings account for a vacation fund for next year, that way we can afford a real vacation without scrimping and saving. I guess he's right, although I would never tell him that, however the beach we want to stay at is on the Gulf coast and I'm afraid that this time next year, it'll be saturated with oil.

We were talking this weekend and I told him, "Do you realize, if we pay off these credit cards, we'll save $825 per month in minimum payments? $825!" He replied with, "Yeah, that sounds great and all, but we use these credit cards for everything. We'll never pay them off if we don't stop using them." To which I answered, "We haven't used them since I told you we're broke. We can live without them, we just have to learn how to."

It's amazing what you don't need when you put your mind to it.

Day 14: Student Loans

My student loan payments right now are not that unmanageable. I have low interest rates on two of them, and a 5% rate on my Perkins loan, which is not really that high when you look at the fixed interest rates being issued now on all loans across the boards.

In my endeavor to reduce our debt, I was looking at consolidating my three loans and possibly getting an Income Contingent Repayment plan, assuming that it would decrease my payments and interest overall. Apparently, based on our income and family size, an ICR would put me on the hook for nearly $925 a month, or approximately 16.5% of our monthly pre-tax income. I'm sorry, but that's almost my mortgage payment! What am I supposed to use to pay, I don't know, my utilities? My car payment? My groceries? Who in the government determined a formula to figure out how much the average person could afford to repay?

I'm sure this is a low end estimate because I used my base salary, not any bonus's that we might receive throughout the year, and my husband is paid hourly. And if you assume that we're paying approximately 25% of our paychecks in taxes, the $925 per month payment becomes 22% of our take home pay. That's just unreasonable.

I was still considering consolidating my student loans, but while investigating repayment options, I saw a statement, in red, that told me that I'm on the grandfathered Graduated payment plan. If I change my payment plan, I can not go back to this plan. My problem is, I don't know if this grandfathered repayment plan is better than the ones that are now offered.

A few years ago, I paid off one of my loans early. My plan was to continue applying that payment amount to the existing Perkins loan, therefore paying it off early. Instead, I applied that payment elsewhere and have continued making the minimum payments. I believe I selected my current repayment plan while looking at the amortization schedule and realizing that overall, my payments would never get higher than I was paying when I first graduated from college.

Now I'm looking towards going back to school and working on a Master's degree. A new degree will mean new loans with higher interest rates and a longer repayment period. In case I haven't mentioned this previously, although my debt payoff mission is primarily to improve our overall financial position, it is also geared towards ensuring that I am able to go to school full time without worrying that I'll need to get a second job to pay the bills, or that one of us will lose our job and our whole family will be underwater.

In my mind, if I can get our credit cards paid off quickly, I will feel a lot more comfortable enrolling full-time in college in September of 2011. Based on our current debt snowball plan, all credit cards will be paid off in November of 2012. That doesn't take into account bonuses, tax returns, any windfall we may receive. Unfortunately, that's just not soon enough.

I keep trying to remind myself that this is a process. It took us five years to accumulate all of this debt, it might very well take us five years to eliminate it. Today, I'm just chipping away.