A little “DOLP” will do ya!
Okay admit it - statistically speaking - you have credit card debt.
The average American household carries $8562 in credit card debt! A lot of people who carry credit card debt are also only making the minimum payment towards their balance. If you carry the statistical average balance, and make the average minimum payment, and never charge another dime; it would take you almost four and a half years to pay off your balance.
I’m no different; I have credit card debt that I’m carrying too. Thankfully, I’m not carrying the average $8562 in debt, but I’m carrying more than zero which means I’m not being financially efficient.
All along I’ve given myself credit for paying over my minimum balance and making some progress towards paying off my debt. I took the approach of spreading my payments around and covering each card with about an equal payment each month. But I will still unhappy with how long I had projected it would take me to pay off the last of my balances. I wanted to find a better way to handle getting rid of my credit card debt.
I found an interesting method in David Bach’s book The Automatic Millionaire. He calls it the “DOLP” or Dead On Last Payment plan; it’s very simple to put into place.
1) First, you create a “DOLP” number for each of the credit cards on which you are carrying a balance. To figure out that card’s DOLP number divide the balance by the monthly minimum payment. If you have a Visa card with a balance of $2300 and a minimum payment of $50, its DOLP number would be 2300 / 50 = 46.
Get DOLP numbers for all the cards with a balance. You can use Excel to make a nice and neat list, plus Excel can handle all of your calculations for you.
2) Once you have all of your DOLP numbers, rank and list them from lowest to highest. Enter this information into Excel or write it on a piece of paper. For example:
3) Next pay the card with the lowest DOLP number first, while making minimum payments on your other cards. If you normally spend $250 per month on credit card payments, in the example above you would pay the minimum monthly payments to Capital One, Discover, and Earl’s Bank - $95 in total - and you would apply the balance of your $250 towards your card with the lowest DOLP number (in this case $155 per month to Citi).
4) When the last payment has been made to a card you cancel it. If you feel like you just can’t cancel the card, freeze it into a block of ice and make it almost impossible to get to it.
Now drop down to your card with the next lowest DOLP number and apply the balance to that card. In the example above you would now be paying $170 each month to Capital One while paying the minimum monthly payment to Discover and Earl’s Bank.
5) As you pay off your balances, you drop all of the money (less the minimum payments) you spend each month to settle your debt down to the next card. You’ll be paying them off faster.
When I first read this I thought it was an interesting idea, but I didn’t know if it was a better way to manage my money than my way - spreading my money all around. So I turned back to Excel to crunch some numbers.
I calculated that if I follow the DOLP plan, I can accelerate paying off my credit cards by more than six months. This is because some of my lower balance cards with a lower DOLP number have higher interest rates. So I’ll be paying those off faster and paying less money overall in interest charges.
If you do use Excel to calculate all of these numbers; here is a handy formula to know. It will calculate for you the number of payments you have left for a given balance, interest rate and monthly payment.
The formula is: =NPER(A/12, B, -C)
For each of the values, A, B and C:
A = Annual Interest rate (APR). The formula divides this number by 12 to get your monthly rate.
B = The amount of your monthly payment.
C = The principal balance. We make this number negative so we will end up with a positive number as the result.
Once you have an Excel spreadsheet setup with this formula you can use it for “what if” scenarios. You can adjust your payment and see how it affects the time required to repay your account. You can adjust your interest rate to see how it will affect the time required to repay your account (call your credit card and ask if they will lower your interest rate, many will just with a phone call).
You can also use it for goal setting. You can set a goal to have an account paid of in a certain number of months and using this Excel spreadsheet you can adjust your monthly payment until you achieve a number that will let you reach you goal.
In the example above, if my goal were - in six months - to pay off a balance of $3822 at 14.99% annual interest, I would need to make a monthly payment of $665.
If you’re carrying credit card debt it’s time to “DOLP” it out of existence! It’s easy to calculate your debt’s DOLP number and put together a plan to knock it out.
Remember, a little “DOLP” will do ya!
9 comments January 31st, 2006
