Many college students and young adults, eager to establish credit, accept too many credit card offers and soon find themselves strapped making minimum monthly payments. If you owe on multiple credit cards, it can be difficult to stay current. Fall behind and you are hit with late charges and maybe higher rates. The pyramid method helps you reduce your debt by addressing one debt at a time and building the payments as each debt is eliminated.
Conducting an Financial Inventory
Before you start the pyramid program, you need to know exactly where you stand financially. Begin with your debt. Catalog your credit card debt, noting for each card the amount owed, minimum monthly payment, late fees and interest rate. Do the same for any other debts you may have. Rank your debts according to your priority in eliminating them. This may be high-to-low interest rates or by the size of the minimum payment. Then list all your expenses -- rent, utilities, food and any other expenses that you must pay monthly. The final entry in your financial plan is your income. Now you have a picture of your financial condition and can take steps to improve it.
Tackling the Problem
If you are going to eliminate debt, you need to cut up all your credit cards except one or two and place those where they will be inaccessible. You cannot take on more debt while you are trying to eliminate it. Now look at your expenses and cash flow. You probably have ways to cut your spending on unnecessary items that will free up cash. Five dollars a day on coffee and a snack adds up to $150 per month. See how many similar items you can uncover, eliminate and free up cash. This requires self-discipline, but you must cut out extras if you want to get out of debt.
Building the Pyramid
Begin your plan by paying the minimum amount on each card and debt except the first one on your list. For the first debt -- the one you have given the highest priority -- pay the minimum plus all the money you have saved by cutting out unnecessary spending. By putting your entire surplus toward paying off your first debt, you are able to wipe it out quickly. After your highest priority debt is eliminated -- all while you have been paying the minimum amount due on the rest -- turn your attention to the next highest priority debt.
Working the Pyramid
With your first debt wiped out, take the money you had been using to make that payment and add it to the minimum payment of the second debt on your list. The monthly payment will be the minimum due for the second debt plus the minimum payment for the first debt plus the surplus cash you created. When the second debt is paid off, apply all this money to the minimum payment of the third debt. Each debt you pay off allows you to accelerate the elimination of successive debts until all are gone. With all of your debts eliminated, you will have a positive cash flow, which you can use to begin a savings and investment plan for the rest of your life.
- Consumer Credit Counseling Service of Rochester: Debt Reversal Pyramid -- "Snowballing Payments"
- Money Matters 360: Getting Out of Credit Card Debt Credit Card Debt Minimum Payments Pyramid Plan Paying off Debt
- Consumer Financial Protection Bureau. "What Is Credit Counseling?" Accessed May 11, 2020.
- Consumer Financial Protection Bureau. "CFPB Spotlights Concerns with Medical Debt Collection and Reporting." Accessed May 11, 2020.
- Consumer Financial Protection Bureau. "How to Reduce Your Debt." Accessed May 11, 2020.
- Federal Student Aid. "Choose the Federal Student Loan Repayment Plan That’s Best for You." Accessed May 11, 2020.
- Consumer Financial Protection Bureau. "What Do I Need to Know If I’m Thinking About Consolidating My Credit Card Debt?" Accessed May 11, 2020.
Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.