Debt Snowball Strategy helps you to pay off your debts by paying the small debts first and then building the momentum towards paying the larger debts. By paying the smallest amounts of debts you can stay motivated and get encouraged towards paying the larger debts.
The debt snowball method works like snowball momentum as you gradually pay off debts. Paying the smallest amount of debt first and then moving on to the next smallest amount of debt in your list. You can then continue the rest of the loan payments with the same strategy.
During the entire process of debt snowball, make the minimum payments on all your loans by putting extra money every month towards small balance loans. Many people have used this method and successfully recovered paying off their debts.
How does the Debt Snowball Method work?
The process of setting up the debt snowball strategy is easy and it includes few simple steps.
Organise your settlements
Make a complete list of debts. Arrange the small balance at the top of list and chronologically arrange the largest to the bottom. As you arrange your debts, ignore the interest rates, monthly payments debts and other features of the loans.
Pay the minimum amounts
If you do not pay the minimum amount required on all your credit cards and loans, you should pay the fees and penalties. It will damage your credit score, if you do not pay your minimum due amounts.
Pay extra on small balances
Every month add extra money to your credit card or loan account by doing this you can reduce the debt balance. You can reduce the due amount and the interest associated with that loan gets reduced.
Build your success
Building a small success can encourage you to do more in clearing your debt burden. When you clear your small loans tick the loan off as paid out. The next step is to target the next bigger loan, a sense of achievement will keep your desire to clear your loans faster. As you keep finishing paying every small loan your total payment for the next loan will be larger. In this way you can clear your debts one after the other and come out of the debt.
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The Debt Snowball in Action
Imagine you have different outstanding loans. You have monthly payments and after all your payments from the monthly budget you have AED 5000 available every month for loan payment. You can use that amount to pay off that debt by applying debt snowball strategy.
You can start by listing loans that you have or the credit card debt that you. Begin it from the smallest loan to the largest one. The extra money AED 5000 that is available will be going towards paying unsecured loans. The unsecured loan will have a higher interest rate and while you target to clear off slowly each month on unsecured loans you will reduce interest on loan.
On the other hand the loans you have continue to pay the minimum amount. After you pay off each loan the debt amount will reduce and you will have additional money to pay off debt. This is a systematic way in which you can build momentum and fully wipe off your debt.
It is an excellent debt elimination strategy, if you enjoy small reinforcement in small victories and you do not have higher interest debts this could be a good option for you. This strategy of snowball is not right for everyone. It will not make any sense in some cases where payments are made through accelerating credit basis systems. You can pay off extra money you have on the loans and reduce your burden of debt.
If the payment is made under an income driven method where monthly you get a fixed amount and then you have a lump sum amount as a yearly bonus. You can use that amount and reduce your burden by paying off your loan. What ever strategy you select, it is very important that you find out what suits you best and follow it rigorously.
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Other available options
When you have extra income only then you can eliminate debt and snowball strategy works only under specific circumstances. The other available options are
Credit Counseling
Credit Counseling is an educational assistance center where you can get counseling on your credit. These agencies are non profit organizations, where the professionals provide you with expert advice and also set up a debt management plan. By using this plan you may be able to reduce your monthly payment and interest rate, it makes you smoothly manage your debt.
Debt Settlement
Debt settlement is considered as an extreme solution, the debt relief companies help the borrowers manage their debt payments. A settlement plan will be provided as part of the service program. During this plan it may advise for payment plans or also suggest filing bankruptcy. The bankruptcy will be done in exchange of fee and Creditors should agree to this method of debt settlement. Debt settlement can hurt your credit score so it is best to use this option as a last resort.
Conclusion
Debt snowball strategy will help you in paying off your debt where you can focus on clearing small balance loans and move to larger loans. If you are paying only the minimum amount, pay it and when you have extra money use it towards smaller debt clearance. It helps you stay encouraged and motivated. If you need any additional help you can consult the experts they can guide you in arranging your debts and overcoming your debt burden.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
