How to Use the Debt Lasso Method to Pay Off Debt Faster
Ready to grapple with that credit card debt?
If the debt avalanche and snowball methods leave you a little cold when you think about all the interest you’ll end up paying, consider the debt lasso method.
Developed by David Auten and John Schneider, the Debt Lasso Method involves consolidating your high-interest debt into low-interest debt so you can pay off the principal balance faster and for less money.
You want to know more ? Auten and Schneider told us all about the debt lasso, including who it can help the most — and who shouldn’t use it.
What is the debt lasso method?
If you’ve read about other debt repayment methods, you might be wondering if the lasso method is just a balance transfer. Auten and Schneider often ask themselves this question.
“The reality is that a central part of the process is to do some sort of consolidation – whether it’s a balance transfer to a zero-rate credit card or a low-interest loan “, said Auten. “But a lot of people forget about those first two plays and the last two plays.”
We’ll look at all the pieces, but first decide if the debt lasso method can help you.
What is a balance transfer credit card and how do they work
Who Should Use the Debt Lasso?
To determine if the debt lasso method is right for you, start by adding up the amount you owe in credit card debt. Then compare this total debt to your annual income. If your debt is less than half your income, the lasso method might be right for you.
So if you have $15,000 in credit card debt and your gross income (before taxes and other deductions) is $30,000, you’re a good candidate for the debt lasso. But if you have $65,000 in credit card debt on the same salary, you might want to seek other help to help pay off your credit card debt.
Although it can be tempting to pay every penny for your debt, don’t empty your emergency fund when you practice the lasso method.
You also might not qualify for the lasso if you can realistically pay off your credit card debt in six months, as the associated fees (usually 3% to 5% of the transferred amount) could cost you more than you’d save. . taking advantage of a lower interest rate.
But if you fall somewhere in between, the lasso could help you pay off your debts in less time and with less interest.
How the Debt Lasso Method Works
Ready to go into the sunset without debt? Whoa there, sorry. Remember: you must follow each step.
You cannot successfully use the debt lasso method unless you are willing to commit.
Auten and Schneider should know: They started their own lasso journey with $51,000 in credit card debt. After years of poor financial choices, the couple were sitting on the floor of their basement apartment when they realized their debt would never allow them to buy a home or enjoy life like their friends.
“It was our lowest moment, realizing that we were here in this financial, literal hole,” Schneider said.
So they’ve made a two-part commitment – which you’ll also need to make if you want to use the debt lasso method:
Stop using your credit cards. No exceptions.
Decide on an amount greater than your total minimum monthly payments that you can reliably apply to your debt each month.
Committing to the process is key, Auten and Schneider said, because it helps you later when you may be tempted to stray off course.
Start with the easy wins by paying off all credit cards with balances low enough to be eliminated in less than six months.
Winning early not only provides a psychological advantage, but also helps your credit score.
Maintaining these lines of credit will reduce your use of credit, which accounts for about 30% of your credit score. And the higher your credit score, the better off you’ll be when you’re ready to lasso.
Check out these 10 moves to skyrocket your credit score.
It’s time to saddle up.
If you have a good or excellent credit score, your goal should be to find a zero rate offer – aka 0% intro APR – where you can transfer your highest interest credit card debt.
We’ve found the best 0% APR credit cards.
But if you have a less than stellar credit score, these offers can be hard to come by. Do not abandon.
You can still benefit from the lasso method by negotiating a lower interest rate with your current credit card company or transferring the balance to a card with a significantly lower interest rate than you are currently paying.
“To get you from 20% to 25% to 9% to 15% is a great first step,” Schneider said.
And don’t limit yourself to credit card offers. Using a personal loan to pay off multiple cards has the same effect.
Compared to the average credit card rate, which was 18.43% in August 2022, personal loans offered a better deal at 10.16%, according to the Federal Reserve.
Whichever offer you accept, transfer or pay off as many balances as possible using your lowest interest rate.
If you still have higher interest balances, prioritize paying off the credit card with the highest interest rate first.
Each time you pay off a credit card, put your money to pay the next highest balance.
Remember that you have agreed not to use your credit cards (see step 1). So keep the ones you paid for. Why?
By not canceling the credit card, you will have more available credit, helping to improve your credit score. And a higher credit score will help you get approved for another interest-free credit card.
Automating your minimum monthly payments for all but your lassoed credit card will allow you to focus on paying off one debt at a time. But automating your payments can do even more to help you.
Remember how we talked about the importance of commitment because of later temptations? Here’s where it comes into play.
You can have multiple credit cards, but we’ll keep the single card example simple: When you started your debt lasso journey, your minimum monthly payment was $80, so you committed to paying $200 on your credit card, an extra $120 each month.
After you pay off part of your balance, your credit card company tells you that your new minimum payment is only $60. Yay! But that doesn’t mean you now have $20 to spend – you should continue to pay $200 every month, sending even more money to your main balance.
By automating your payments, you will be less tempted to reduce the amount when your minimum payment drops – a kind of out of sight mentality.
Putting all the extra money on your card with the highest interest rate will help you pay the least amount of interest over time. And this is where the last step becomes crucial.
Now is not the time to put your debt payment strategy on pasture. Monitoring your accounts is an important last step, as those credit card rates can go crazy if left unchecked.
Before you reach the end of a zero interest period, start looking for other offers that allow you to transfer your balance to avoid being stuck with the new higher interest rate on your old card. .
Although opening new accounts can temporarily hurt your credit score, Auten and Schneider point out that the long-term benefits of paying off debt faster can help counter this effect.
Who Should NOT Use the Debt Lasso Method – For Now
A word of warning: if you’re in an industry where you could be fired or laid off suddenly, you should probably keep your horses — and your money.
“If you get an offer and you can’t make your payments anymore, you could end up with a 25-30% interest rate,” Auten said.
Credit card agreements often include a clause in the fine print that allows them to raise your interest rates if you miss a payment during the zero rate offer period. Some will even sneak in the right to get back all the money you previously saved during the promotional period at the new interest rate.
The take-home lesson: read the fine print.
Saving your money for now will allow you to build up an emergency fund in case you lose income. And if it turns out you end up with an extra nest egg, consider that a bonus payment when you go back to the debt lasso method.
Tiffany Wendeln Connors is The Penny Hoarder’s associate editor who is all about corny puns. Lily his bio and other works herethen find her on Twitter @TiffanyWendeln.
This was originally published on The Penny Hoarder, which helps millions of readers around the world earn and save money by sharing unique job opportunities, personal stories, giveaways and more. The Inc. 5000 ranked The Penny Hoarder as the fastest growing private media company in the United States in 2017.