How to Use Debt Snowball Method to Get Out of Debts
Debt snowball method is one of the proven ways one can adopt to pay off his debts. As I usually say, it is easy to get into debt but to get out is not as easy as that. Possibly, you have some debts which are becoming too burdensome for you to carry. You should not allow that to weigh you down. I can understand how you feel. Even if the creditors don’t call you for collection, the thought of the debts is enough to destabilize one. No matter the amount of your debt, the fact is that you can get out of it. I know you may be asking, how? Well, that is what the article is about to explain.
There are several ways or strategies one can use to pay off his debts. I will discuss one simple but effective way of getting out of debts. The strategy is called debt snowball method. You might have heard about it before or it may be that you are hearing it for the first time. For the benefits of people who have not fully understood the term, I will like to explain it in a layman language so that I can carry everyone along.
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What is debt snowball method and how does it work?
Debt snowball method is better explained with illustration instead of given a definition that can further confuse person. Let’s assume that you have different debts like credit card debts, auto loan and student loan. To make it more explanatory, we can go further to assign some figures to the debt as follows:
| 1 | Credit Card Debt – 1 |
$600 |
| 2 | Credit Card Debt – 2 |
$1,500 |
| 3 | Auto Loan |
$9,000 |
| 4 | Student Loan |
$15,000 |
| Total |
$26,100 |
You will agree with me that there is difference between someone owing $26,100 on four debts and someone with just one debt of the same amount. It is most likely that the debts as highlighted above will be due for payment in different dates. You have the responsibility of ensuring that you make your monthly payments promptly. That is, it is not enough to make your payments, you must ensure that you don’t make late payments. Otherwise, the late or missed payments will be reported to credit bureaus. This will make the late or missed payment to appear on your credit report. Creditors don’t like to see this on customer’s credit report anytime they make enquiry on customer’s credit file. What this portrays is that it is either you are not organized or you are having difficulty with your finances. But for someone with just a student loan of $26,100, his mind will be on just one debt and it will be easier to manage.
From the above illustration, we can now look at how debt snowball method works. Your own debt structure may not be exactly like what I listed above. If you want to adopt debt snowball method, you will need to first list all your debts starting from the smallest to the largest just the way I did above. From my own example, you could see that I started with the credit card debt of $600 up to the student loan with the highest balance of $15,000.
The next step is to identify the minimum payment per month that you need to make on each debt. You will add the minimum payment amount together and deduct the figure from the amount you have available to commit towards repaying your entire debts. What you are trying to achieve is to know how much you have left after you must have paid your minimum amount on each debt in a given month. Whatever the amount that is left will be applied toward paying your smallest debt. From the example of the debt profile which I gave above, after you must have paid minimum amount on your card 1, card 2, auto loan and student loan, whatever cash you still have with you can be used to pay off the card 1 balance. What of if the remaining amount is not sufficient to pay the card 1 balance? Don’t worry about this. You just need to ensure that whatever amount left is channeled towards paying the smallest debt. By the time you do this, say between one and three months, you will be able to strike out the smallest debt.
When that is achieved, you will no longer be carrying four different debts. In fact, you will be happy with yourself that you are making progress. Paying off one out of four debts is actually a major milestone for you. Once you have achieved this, you will need to repeat the process again until you totally pay off the second debt. This will continue until the entire debts are fully paid off. Debt snowball method is actually a good strategy anybody can use especially when you don’t have much money to commit to paying off your debts. You will be able to see the impact on the little repayment amount you make every month. The fact that you are able to strike off one debt will motivate you to do more so that you can quickly pay off the second debt.
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Who Can Use Debt Snowball Method?
Before you can start talking about debt snowball method, it is probably you are having more than one debt. Why am I saying this? Debt snowballing requires ranking of your debts from the smallest to the highest. You can’t be talking about the smallest if you just have one debt such as auto loan. If you have just one debt, all what you need to do is to ensure that you commit yourself to paying down the debt aggressively.
Debt snowball method is good for people who are burdened with their debts and don’t know what to do about it. When debts are too much, it can get to a point that you feel overwhelmed and don’t know what to do about it again. Debt snowball method is like taking a baby step. In anything you want to achieve in life, taking the first step may be the most difficult thing to do. Once you have succeeded in taking the first step, you will not be that afraid to take the second step. Once you are able to pay off the first debt, it will suddenly occur to you that you can equally pay the second step using the same debt snowball method.
Debt snowballing can also help you see the effects of the little efforts you are making towards paying off your debt. For example, if you pay $300 from your student loan of $15,000, the amount will be insignificant. But if the same amount is channeled towards paying your card balance of $600, you will be able to pay off the entire $600 balance within two months.
What to avoid in debt snowballing
If you decide to use debt snowball method to get out of debts, you need to understand that this does not mean you will face the smallest debt only and then abandon the other debts entirely. No. You can’t do this. You still need to make minimum payment on the other debts. It is after you must have paid your minimum payment on each debt that you can then apply the remaining amount you have towards paying the smallest debt. Abandoning the other debts will cost you money and your credit will also be affected negatively. Any late or missed payments on your debts will be reported to the credit bureau agencies. The late or missed payment will appear on your credit reports. Late payments will remain on your credit report for seven years. But the only good thing is that if you start and continue to pay at least the minimum amount, the effects of any late payments on your credit will become less over time.
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Disadvantage of Debt snowball method
The main disadvantage of debt snowballing is that, your smallest debt may not be the most expensive debt to you. For instance, the apr on card 1 may just be 10% while that of the second card is 18%. Economically, it would have made more sense to start paying the debt with the highest interest rate. This other method of getting out of debt is called avalanche method. If you use avalanche method, you will need to focus attention on the debt with the highest interest contrary to debt snowball method that focuses on the smallest debt. But if you need little motivation in order to encourage yourself, debt snowball method may be good for you. At least, you will be able to see the effects of the little efforts you make on your overall debts.