The “Debt Snowball Method,” proposed by financial guru Dave Ramsey, is one of the most common ways people eliminate debt. The ideal candidate for this method is someone who has accrued debt in the past but has set aside $1,000 or more for emergencies. Now that the debtor is in a stable position, he or she can begin hacking away at that snowball of debt.
This type of debtor feels overwhelmed by the number of outstanding debts, credit cards and monthly payments. To begin feeling a sense of accomplishment and to pick up momentum, this debtor will pay off the smallest balances first, working gradually toward the larger sums. The Debt Snowball Method simplifies and reduces debt, thereby exciting the debtor and ensuring success.
Video: Dave Ramsey Explains the Debt Snowball
By contrast, there is the “Highest Interest Strategy,” which asks debtors to do just the opposite: pay off the highest balance/highest interest cards first. The ideal candidate for this strategy is someone who also has an emergency cushion and high level of debt, but someone whose credit interest rates have skyrocketed. To get out of debt quicker and stop overall debt from escalating, it makes sense to get rid of the bill that’s causing the biggest headache first. The drawback here is that it could take many months for the debtor to see any progress.
For the genuinely “shocked” debtor who lives paycheck to paycheck, eliminating debt may be a matter of keeping a record of expenditures and taking a good, hard look at where the money’s going. Luxuries like eating dinner out, weekly shopping trips, going to the bar or taking lavish vacations will have to be put on the backburner until the debt is paid off. Making a budget and sticking to it is the best way to stay out of debt in the long run.
Credit-dependent debtors should switch to cash and only buy what they can reasonably afford. Many people get into debt by senselessly escalating credit cards; however, as the Federal Trade Commission points out, credit should be used as a tool, not a means for subsistence. Even though the minimum monthly payments are low, most debts can never be paid off that way. A good place to start is by never charging more than what can be paid off that month. It’s easier to keep track of expenditures when the tangible dollars are in a wallet. Credit should then be used only for emergencies. Debtors can then pay off double or triple the “minimum monthly payments” until the debt is gone. This method will also boost low credit scores.
There are also debt consolidation loans and debt consolidation services to assist debtors. A consolidation loan will stop the debt from escalating, allowing debtors to pay one lower minimum monthly payment. With debt consolidation services, the company will negotiate with creditors to end harassing phone calls and work out a new repayment plan. Either way, the debtor will deal directly with the debt consolidation company each month, rather than their various creditors. The best candidates have steady monthly income, but feel overwhelmed by harassing creditors and are presently trying to save up their emergency funds.
Why You Should Consider Professional Debt Consolidation
It’s not always easy to ask for help, but it’s comforting to have a friend that listens to your concerns and reaches out to assist you. The road to debt recovery can be long and lonely. A professional debt consolidation company helps you not just in moral support, but they also help end the irritating collection calls. When you’re trying to do the right thing, it’s frustrating when everyone treats you like a delinquent still or demands unreasonable payments you simply can’t make. Professional debt consolidators can also help lower your overall debt as much as 60% by negotiating with your lenders to reduce interest rates, minimum payments and collection costs. It’s easy to miss a payment when you have to pay off several different cards, plus all your utility and mortgage bills. The consolidators also report your timely, positive payment information to the credit bureaus to reduce the impact of missed payments or late payments on your credit report. To get started with a professional debt consolidation company, all you need to do is take a moment to fill out the form above. The within a day a friendly professional debt counselor will call to help assess your financial situation and start managing that debt with you.
The Debt Snowball Method in Action
Video: Debt Snowball Example
One college graduate made a hasty move from New York to Toronto in 2003, only saving $2,000 for her move. Once she arrived, she found that rent was $1,000/month and it was much harder to find employment than she had anticipated. She lived for several years, working odd jobs and bouncing from credit card to credit card irresponsibly.
Eventually she found herself $14,670 in debt. She owed $2,642 to Citizens Bank for her car loan, $1,350 to her cell phone company, $490 for her past due utility bills and $700 for her rent. But what was really nagging her were those seven hefty credit cards: HSBC (owing $400, $25 due); Victoria’s Secret ($197.41, $35 due); Discover ($222.10, $50 due); M&T Visa ($1378.30, $60.42 minimum monthly payment due); Chase Mastercard ($5,076.04, $1808.04 minimum payment due); National Geographic Mastercard ($2,564.53, $144 minimum monthly payment due) and Canadian Tire Mastercard ($751.07, $74.07 due) So, in order to pay off all her minimum monthly payments, she would need to pay a combined total of $2196.53 in January alone! She would still have a whopping seven credit card bills to pay the following month too.
First, this wayward college student started by picking up a second job to bring in extra revenue. Then she made a list of all her outstanding debts, along with the total amounts, the minimum monthly payments, the due dates and the interest rates. Next she calculated her monthly income, deducted her mandatory monthly expenses (food, rent, utilities, car loan) and found that she had $800 leftover to put toward her debts each month. She then worked with a credit counseling company to lower her minimum monthly payments down to $15 each so she would only need to pay $105, rather than $2196.53.
As the Debt Snowball Method suggested, she started by paying off her three lowest balances -- Discover, HSBC and Victoria’s Secret -- in full. This gave her a tremendous sense of accomplishment and enthusiasm to stay on track. The following month, she only had to worry about four creditors, which seemed much more manageable. In March, she paid off her Canadian Tire Mastercard in full. In April, she paid more than half of her M&T Visa and by May she was down to two creditors. She continued to pay off her two largest amounts over the next nine months and within a year’s time she was completely out of debt!