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25 November 2007

Paying off your mortgage and credit cards

Debt, what a rotten word. Yet it’s what most of us have to sign up to, live with and work through if we are to own our own home. Let me say first that I know there are many ways to pay off debt. I’m writing about what worked well for Hanno and I. This is what I have experience in. Other methods may work equally as well but as I have no experience of other ways, I can't write about them.

As I said in the previous post, we paid off our mortgage in eight years. It was not easy, few things that are really worthwhile are ever easy, but we decided on our plan and we stuck to it. Yes we fell of the wagon a couple of times, but when we did, we got right back on and knuckled down again. We also had a healthy deposit when we bought our house.

If you’re thinking of buying a house, don’t wait until you buy it to start putting money aside. Work out how much you can realistically and consistently pay off a mortgage, and from that moment on, start putting that amount aside. While you’re looking around for your home, this money will be building up and when it comes time to pay your deposit, your nest egg is there. Add it to your deposit. Once you’re locked into the mortgage, pay as much as you can each month. Make extra payments if you’re able to.

If you have credit card debt, and have debt on a few cards, I like the snowball method of paying them off. First you make a list of your credit card debt, from the smallest to the largest debt. Then, before you pay anything from the debts, you save an emergency fund of between $500 - $1000 to provide a safety net in case something happens that you need money for. This will allow you to use your emergency fund instead of your credit cards in an emergency.

When you snowball debt, you pay off the smallest debt first, while continuing to pay the minimum payment on your other cards. When the lowest debt is paid off, you go to the second lowest debt and do the same thing. When you pay off the second card, you'll have more money for your payment because you'll have paid off one card, so you use that money to increase your payment on the second card, and so on, until you've paid them all off. Always pay the minimum payment on your other cards.

Be careful of temptation while you're in your period of debt reduction. The bank will write to you offering to increase your credit limit - they say this is your reward for being an excellent customer and for paying off your debts so well, but in reality it's to trap you in ever increasing debt that they reap huge rewards from. It is not in the bank's interest for you to be debt-free. So when they write you that letter telling you that your limit is increased, write back and say you want to decrease your credit limit. Decrease it so you don't face temptation.

Read more about snowballing debt here.

When you have your cards paid off you should keep ONE of them. That one card should have zero balance and a limit of about $500. This is what Hanno and I have now, we have had this card for many years, we rarely use it, but it's there, just in case. We find that paying for things with cash, feels like we are really spending money, whereas buying with a credit card doesn't. There is nothing like the feeling of handing over a couple of $50 notes to let you know you're really spending, and to be careful.

Now, this is the bit that I really wanted to share with you.

When you pay off your debt you have to be strong. It will be very easy to go the other way, say it doesn't matter, or your best friend has a new dress and you should have one too, or the car needs new tyres NOW. Don't betray yourself. Stay true to what you want to do. Stay on the path you've planned out and don't keep spending. If you do need a new dress or new tyres, then they should be saved up for, not whacked on the credit card. Please don't betray yourself. That is what you'll be doing if you keep spending.

I firmly believe that Hanno and I have such a strong marriage because together we decided what our shared values were and we worked as a team for what we wanted. Debt reduction was part of that. We decided that our days of being screwed by the bank were over, we wanted to be free of debt and the weight of carrying that debt around with us every day. Together we listed our debts, together we planned our escape from debt and together we worked towards it. It helped build our marriage because we were working towards a common goal and when we saw each other making the sacrifices necessary for our success that built into our marriage a feeling of pride, security and strength.

I can't tell you what it will take for you to pay off your debt, but if it's giving up your Saturday shopping sprees, selling your decluttered household items on ebay or cutting back on your spiralling grocery bill, do it; do whatever it takes. You and I both know it won't be easy but whatever pain, inconvenience or anxiety it causes will be forgotten when you come out the other end and live debt-free. Having no debt will give you freedom to live the way you want to live. So what's stopping you? Be brave, take a deep breath and dive in.


  1. I just wanted to write a little note and tell you how much I am enjoying reading your blog. My boys and I are anxious to make some of your ginger beer when things slow down a little for us - deer season is here and we have been canning meat most of the week.

  2. Another great Post.:o)
    Hope you are having a great week.Bl;essins', Lib

  3. Great post Rhonda. B and I only have one credit card on which we put all our expenses and pay off in full each month, or at worst by the second month. This works for us.

    I have seen the trouble friends have got into with 8 or 10 cards.

    I visited Myer the other day for the first time in ages and at every counter they asked, "Would you like a Myer 1 card?" I found this very annoying and I won't be going back.

  4. RJ, I traded in our credit cards for debit cards a few years ago. Our cards were always up at the limit which we had the money to pay, but "forgot" sometimes. Now we are using our own money on plastic, but you're absolutely spot on when you talk about the difference between handing over plastic, and handing over notes. When you pay for your purchases with notes, you actually have a sense of feeling poorer, and therefore you think very carefully about whether you need what you are buying. When it's on the card, it just doesn't mean as much. LJ

  5. great advice... we only have one card which we pay in full each month... our home has been paid for for several years... it was difficult like you said but it is a good feeling to not owe any one any thing...
    your post is very informative...

  6. This is a great post. My partner and I kept saying we were going to save and buy a house, but it never happened. Now that I am starting a new job we have started a new bank account and all my pay except for $50 a week will go in there - we have been living off just his income for a few months so $50 a week for me to spend is luxury, plus we will save a big chunk of money.
    I think you are right - what's 8 years of going without the excess crap if for the next 40 years you can be debt free and own your home? Well worth it in my opinion. Now if ebay would just stop calling my name...

  7. Hi Rhonda jean,
    There is also an up side to credit cards if used properly.We put big items on our cc then Dave pays it in full at the end of the month. Example all the work we had done on our home over the past month. We had the cash in the bank to pay for it but we put it on our credit card then when the bill came in paid it off. There is 2 benfits to this. If the service company doesn't do the job right we have a recourse to get our money back second we get money back from the credit card company.With the repairs this past month we have a 200.00 refund check coming from the credit card.
    I agree debt is bad but credit cards aren't. It is like anything esle it is all in how we use them.
    Great post.

  8. We bacame debt free in April this year and it is WONDERFUL!!!
    I got my first mortgage when I was 17 and 5 houses and 29 years later we are finally out of debt FOREVER!!!
    I use cash for my everyday expenses and use my one credit card for other things(birthdays, fabric etc) and then transfer the money over as soon as the transaction appears on my account. I never buy anything unless I know I have the cash in the bank to cover it but I like to use my cc so I can accumulate rewards points which I cash in for gift cards to use as presents. This year I have given out $100 in 'free' gift cards and also had $100 in supermarket cards that I used to start my stockpile. I LOVE taking advantage of the bank ;)

  9. As always Rhonda, you give excellent advice. Like a couple of your other commenters I have a slightly different attitude to the issue of credit cards though. I only know how the credit card companies operate in the UK, but here they offer lots of incentives to use credit. If you play the game wisely, you can get free credit or money back offers which can boost a limited budget. I'm a single parent, supporting my daughter through university and an adult son with a disability and I still have a mortgage so money has to stretch a long way. I take advantage of the offers as they help a lot. For example, I use a credit card to pay for petrol as I get 4p a litre off of a specific brand of petrol. I always pay off the balance in full, except where I have 0% on purchases where I pay the minimum balance, but I always make sure the rest of the balance due is saved in a high interest account. I never spend more than I can afford and that's the key. This way of taking advantage of credit card companies is explained much better on websites that specialise in giving money advice. I won't mention my favourite as you might think it's advertising!
    All the best

  10. We also clear our 2 cards every month. One of them is a gas card that allows us to save substantially each month (a 10 cent per litre discount.)
    I have to second you on Dave Ramsay's book it is exceptional, simple and easy to read and very very solid!

  11. Rhonda, how inspiring. I don't have a credit card at all - I pay for everything with cash! It really makes me feel I'm spending. So I don't spend much.

  12. A credit card is really handy, but only if you've got self control! I do lots of my grocery and other shopping online and find it's much easier to control my spending because I'm not looking at all the things that aren't on the list. It also saves me a lot of time.

    When I was saving for my first overseas trip I was scared that I'd 'accidentally' spend my savings on shoes or something. So I 'froze my assets', I put the credit card (wrapped) in the freezer. I figured that way I would have to come home, and warm it up, before I could purchase anything significant.

    If anyone does have multiple credit card debts, they really should see a financial advisor. There are often free or subsidised ones around. Another option is to combine all the credit card debts into one personal loan at a lower rate of interest. If it's a big debt it's worth working out the sums with someone who knows what they're doing (not me!)

  13. “When you pay off your debt you have to be strong.”—This passage states great value, Rhonda. Debt is something that can't just be ignored, or something that we should outlive, especially when you are planning to get a new house or thinking about educational plan for your child's future. But then, if you plan to get a loan, you should measure your limit. In that way, you won't bury yourself from thinking how can you release yourself from such predicament.

    Abdul Jackson


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