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Jan 8, 2009

Credit Accelerator - A New Approach to Reducing Debt

We came across a program called "Mortgage Accelerator" which caught our interest. After listening to the pitch we were not sold on the idea however the concept seems to make sense. The program converts your mortgage, or a portion of your mortgage, to a line of credit that you use as a checking account. Your entire pay check goes into the account and reduces the principal by a significant amount and then your living expenses adds back to the principal that is owed.

In theory the reduction of the principal over the life of the loan has a huge impact on the amount of interest you will pay. In addition, all of your extra pay goes to the mortgage automatically thus reducing your debt.

The obvious "cons" we could think of include:

  • Your extra money or savings is completely used to pay the principal.
  • There may be Annual fees for the line of credit.
  • Closing costs of the loan may negate the value of the acceleration.
  • Interest rates on lines of credit are variable and generally higher than fixed rate mortgages.
  • There may be fees to use the program.

So here's my "Credit Accelerator" spin:

  • Select the credit card with the highest interest rate. (Also consider credit card rewards.)
  • List out all of your bills and expenses that you pay by check each month.
  • If you can use a credit card to pay the expenses don't list them.
  • List the savings deposits that you make each month.
  • Deduct your bills, expenses, and savings from your monthly take home pay.
  • The calculated amount can go against your credit card balance.

In theory the results of the steps listed above have the benefits of the "Mortgage Accelerator" with out the cons. Your high interest credit card balance is reduced and you have little to no extra fees. A word of caution: "Do NOT think of this as a way to increase spending. Spending more per month will add debt and will increase your expenses and will only make things worse".

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