Think of him as the Father of Debt Reduction. His name is Marc Eisenson and he has been telling people how to save money on their mortgages or credit cards since the late 70’s. Most people know him through The Bankers Secret, a book that began as a booklet in 1984 and was published by Villard in 1991. Mr. Eisenson has also developed software to calculate savings from mortgage and credit card prepayment and publishes a newsletter on living inexpensively.
I called him last week and asked how people could reduce their debt. Here is what he told me:
“Most people have a mortgage, a car loan, and a pocket full of credit cards. They are just scraping by. They may also have a student loan. They make payments from month to month, mostly minimum payments, and they sink in an emergency.
“I think this happens because we get the idea that if something is available, we’re entitled to it. Lenders spend a lot of time convincing people that borrowing is smart, so people borrow to spend.
“We really get into trouble when we borrow to pay for dinner or to go to an amusement park. We do this with credit cards. Long after you’ve gotten off the Ferris wheel —or finished the meal— you’ll still be paying for it.”
How can someone get out of debt?
“First let’s assume the problem is credit cards— it usually is— but not at so high a burden that bankruptcy is inevitable.
“After that, it’s a matter of simple steps.
- Start looking at where you are spending your money.
- Stop using your credit cards.
- Start paying as much as possible on the balance with the highest interest rate.”
“Then you take out your credit cards and get on the phone. You ask for a lower interest rate and no annual charge. Sometimes you’ll have to speak with several people but it isn’t unusual to be able to get a lower rate. If you can get a pre-approved card with a low ‘teaser’ rate, get it and transfer your balance… but continue to pay the old dollar amount. Never pay only the minimum payment. Pay as much as you can.”
Most people don’t understand, Mr. Eisenson said, that credit cards and revolving accounts work differently from auto, home improvement, and personal loans. Instead of having a fixed payment, credit cards calculate the monthly payment as a percentage of the outstanding balance. As a result, the monthly payment declines with the outstanding balance. This, he points out, works to make the debt last longer and increase the amount of interest you will pay. For example, interest on a fixed payment, five year auto loan will be about 25 percent of the amount borrowed while interest on a credit card schedule will be about 86 percent of the amount borrowed— more than three times as much.
“But you can turn the tables on the lenders”, Mr. Eisenson said.
“You can benefit in the same way as they have. You can make a pre-payment.”
I asked him to explain what that would do.
“If you get a CD, the longer you hold it, the more it will be worth. That’s the magic of compound interest. Well, it’s the same with debt pre-payment— your prepayment saves interest for the length of the obligation.
“One of the nice things about saving money on interest is that the government hasn’t found a way to tax it. If you’re paying 19.8 percent interest on a credit card, it’s real cost is a lot more because you’re paying it with after-tax income. If you’re in the 28 percent tax bracket, for instance, you’d have to earn 27.7 percent on an investment to do as well as prepaying on a credit card.”
One factor common to all approaches to debt reduction: you never reduce your payments. Each time you pay off a debt, you apply it’s payment to the next debt on the list. As a result, the amount pre-paid on each debt grows each time one is eliminated. By the time you get to the last debt on the list, usually a home mortgage, there is a good chance it will be paid off in 5 or 6 years.
How do you choose which debt to pay off first?
Answers to that vary. If you use the debt reduction planner in Quicken, it will optimize your debt reduction by paying off the highest interest rate debt first. Financial Independence Network, one of the multi-level marketing companies selling debt reduction plans, uses another ordering technique: divide the current balance owed by the current monthly payment, then pay off the debts starting with the lowest number on that list.
Either way, credit cards are usually at the top of the list, followed by personal loans, and car loans. Home mortgages and home equity loans are last on any list because their terms are longer and their interest rates are higher.
How much can you save?
Lots. Suppose, for instance, you have a $2,000 credit card debt at 18 percent interest with a $40 minimum payment. If you pay according to the credit card company schedule, you’ll be paying for 94 months and shell out $1,724 in interest. Add only $10 a month and make a $50 monthly payment and the debt will be paid off in 62 months and your total interest cost will be $1077, a saving of $647. Add $20 a month and your debt will be paid off in 47 months and you’ll save $931 in interest. Basically, you save about $1 in interest for every $1 you pre-pay.
Similarly, if you add only $100 a month to the $1043 monthly payment on a thirty year home mortgage for $150,000 at 7.5 percent, you’ll knock 88 payments off the mortgage for a savings of $65,385 in interest. ( These figures were calculated using Mr. Eisensons’ Card and Bankers Secret software. )
Want to learn more? While there are a multitude of debt reduction plans and courses available, the least expensive is from the father of the idea. You can obtain a copy of Mr. Eisensons’ booklet, “Debt Consolidation 101: Strategies for Saving Money and Paying Off Your Debt Faster” by sending $4.50 to Good Advice Press, Box 78, Elizaville, NY 121523.
Readers with computers can try the debt reduction program located on at www.quicken.com or play with any number of financial calculators at www.smartcalc.com.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Mikhail Nilov
(c) A.M. Universal, 1997