On a recent radio show, Clark discussed the Eisenson method for paying off debt where someone in credit card debt can get out of debt in a quarter of the time it would otherwise take if you were just paying the minimum balance.
Under the Eisenson method you cut the minimum payment you owe in half and pay that amount every two weeks instead of paying the full amount monthly. Then, instead of reducing your payment each month to the minimum required amount, you keep paying the same amount you paid the first month.
That seems like a good idea. And it is easy to see how that would reduce the time it takes to pay off a credit card by a little. But does it really help you pay it off in a quarter of the time? Cutting the payoff time by 75% seems really optimistic, maybe even unrealistic. So I did the math to find out for myself.
How the Eisenson method works
To show how the Eisenson method works, let’s imagine a sample credit card that we owe money on.
This credit card has a balance of $10,000 and an interest rate of 30% with a required monthly payment of 1% of the balance plus a month’s worth of interest. If we only made the minimum payments on this card it would take 313 months to pay off and we would end up paying $23,768 in interest over the life of our payoff.
Now let’s see how much we can reduce those numbers with a few simple tricks.
The Eisenson method relies on three separate factors to reduce the amount of interest you pay and to speed up the time it takes you to get out of debt:
- Paying twice a month instead of monthly
- Making one extra payment per year.
- Not reducing your monthly payment
Paying twice a month instead of monthly
In our sample credit card from above, the monthly payment when the balance is $10,000 would be $350 per month. So if we follow the Eisenson method instead of paying $350 once a month we are going to pay $175 twice a month.
That is important because that means for half of the month we reduced the principal we owe by $175, so we don’t have to pay interest on that $175 for half of the month.
After one month, that will save us a little over $2 in interest. The second month we will save that same $2 plus the interest on the $2 we saved from the first month. The third month we save $2 plus the interest on the $4 we saved from the first two months. You can see how the savings over time will build and build and build.
Over time this will build to a total interest savings of $1,000 and cut our payoff time by 34 months from 313 months to 279 months.
Making one extra payment per year
The second factor that makes the Eisenson method work is that it tricks you into making an extra payment a year. If we make a half payment every two weeks that means we are making half payments 26 times a year, which is the equivalent of making 13 regular payments. That is one extra payment per year.
If you were to do nothing else except pay the minimum payments plus one extra payment per year that would have an even bigger effect than paying twice per month. Over time that extra payment would reduce the amount of time it takes to payoff the credit card by 66 months from 313 months to 247 months. It would also save you a whopping $5,161 in interest payments over the life of the credit card, cutting your total interest payments from $23,768 to $18,607.
Don’t reduce your payment
The final factor that makes the Eisenson method work is keeping your payments steady. When you pay a credit card’s balance down each month, the minimum payment you owe on that card also goes down each month. A reduced payment might make it easier to get through the month without running out of money, but it absolutely devastates your effort to get out of credit card debt.
Not reducing your payment each month is by far the most important factor making the Eisenson method work and the effects are HUGE.
If you look at the card we imagined above, doing nothing else but continuing to pay the original minimum payment of $350 rather than what your statement tells you reduces the time it would take to pay the card off by an incredible 84%!
Instead of taking 313 months to pay off, it would only take you 51 months. Instead of paying a total of $23,768 in interest you will only pay $7,758. That is a savings of over $16,000!
If we follow the Eisenson method completely and use all three factors simultaneously the savings really add up. From our original 313 month payoff time, it now only takes us 44 months which is just 14% of the original time.
The amount of interest we pay drops from the original amount of $23,768 down to a mere $6,339 which is just 27% of the original amount.
So I got a slightly different answer than Clark and if you pay off your high interest credit card with the Eisenson method the amount you save will also be slightly different based on the balance of the card, the interest rate you pay, and your minimum balance. What remains the same is the enormous savings and the fact that you will get out of debt in a fraction of the time it would take you if you just paid the minimum on your card every month.