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!
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January 31st, 2006
9 Comments Add your own
1. Get Rich Slowly » C&hellip | May 16th, 2006 at 7:47 am
[…] This week’s Carnival of Personal Finance is up at 2million. The host’s picks focus on 401(k)s, though there are many posts on a variety of subjects, including a great overview of David Bach’s DOLP method for eliminating credit card debt. […]
2. A little "DOLP"&hellip | February 9th, 2007 at 7:15 am
[…] January Allan Caguiat03:46 amAdd comment “Okay admit it - statistically speaking - you have credit card debt.” […]
3. Steve B | April 26th, 2007 at 7:59 pm
Very very interesting. Good points made here.
4. mabel | September 22nd, 2007 at 12:10 pm
I have figured my DOLP and I am confused I have 2 cards and the DOLP is telling me to pay off my 4.99% card first and then pay off my 9% card after. I am not sure this makes sense to me Can you explain it Mabel
5. Jacob | September 25th, 2007 at 9:56 pm
@Mabel -
I don’t know if paying a 4.99% card over a 9% card is the best financial sense. I’ve since read that one of the keys behind the DOLP strategy is that you’ll pay off the cards with a lower DOLP number faster - and that gives you some encouragement to keep with the plan (since you see some tangible progress).
Of course, if I were you I would crunch the numbers and figure out how much more it will cost you to carry a balance on a card at 9% interest versus 4.99% interest!
6. Im getting out of debt! | January 15th, 2008 at 8:41 am
“I don’t know if paying a 4.99% card over a 9% card is the best financial sense.”
Maybe it doesn’t. But I must say, My wife and I (who are currently helb back by 152,000 in debt THIS INCLUDES OUR MORTGAGE) have implimented this program and in 1 month have paid off 3 cars. They wern’t huge balances (3000 total) but the point is, that is an extra 150.00 per month towards the other debt. I’ve done the number crunching, numerous times, I DO IT OUT OF BORDEM AND FOR FUN NOW, if you made min pymnts on everything and paid a little more towards the highest card, (in our case the highest is 18,000) yes, you will see debt reduction, BUT you really don’t have that much extra to put on other cards. God forbid if you had a situation that required you to pay something immediatly and you didn’t have it b/c you were paying off the highest c.cc first. As I said before, we eliminated 3000 in one month, thats 150 towards our next card of 1500 w a min monthly payment of 50. Do the math. Now we’re paying 300 a month. That’s a 5 month payoff. After that, we have 350 to our next card. I worried about paying off the highest interest card first too. Believe me, DONT! By the time you get to it (in our case we’ll have 1000 a month to pay towards it in 1.5 years) the balancewill drop quickly andso will the minimum.
This really is a no brainer. By the way, di I mention our household income is 47k? That is just my wife’s job. I’m out of work and we still have done this with success this month. This will still be true if I stay unemployed. IMAGINE WHAT WILL HAPPEN WHEN I GET A JOB!
Another thing to note: our debt is 152,000. By our calculations, this will be paid off in 6 years; home, credit cards and all. Calculate your credit card payoff with you home on minimum payments using DOLP and do it with your motgage. That number you get (BALANCE / MIN. PAYMENT) that’s how long in years it will take you if you pay only minimums. Scary huh?
DO IT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
7. Im getting out of debt! | January 15th, 2008 at 8:43 am
Ok, my spelling and typing sucks. So does debt, get over it.
8. slothX | March 2nd, 2008 at 8:51 pm
I understand the DOLP thing. Yes, I too and drowning in debt, but what I wondered is when I create the list, do I pay off the lowest one each month when the DOLP is recalculated or do I calculate the DOLP once and that’s it? I say this because I calculated the DOLP and each month it changes from card to card. One will have the lower DOLP and another the next month. Am I doing something wrong? I’ve recently paid off a car and am applying the amount that I paid toward the lower DOLP card. One more payment and it’s gone for good! I’ve also heard to keep the cards with zero balance and not use them to build up your credit, instead of closing the account? Is this true to keep it open? Thanks for great tips.
9. Jacob | March 2nd, 2008 at 9:06 pm
@slothX - I’ve come to realize that the general idea of the DOLP plan is to get you paying down debt, and to see small wins by knocking out balances more quickly.
It’s almost exactly what Dave Ramsey teaches, pay down your smaller debts first. It’s not the best mathematically speaking, but you get to see small bills just “go away” and that keeps you motivated to keep paying on all your other bills.
Once you get a few quick wins under your belt you’ll be feeling good and on your way to making a significant change for the better in your life!
So don’t sweat re-doing all your DOLP numbers each month. Get a plan together that you feel comfortable with - be it DOLP or Dave Ramsey (or any others like these) - and start working to get out of debt!
The most important thing is to cut up credit cards and cancel revolving accounts that might let you get back into trouble. It’s not enough to pay debt off - you have to change the way you THINK about debt so you don’t incur NEW debt along the way!
Regards,
Jacob
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