If you have credit card debt, the most important thing first. Take a deep breath. You are not alone. According to the Office of Consumer Finance Protection, Americans have about USD 1 trillion of credit card debt. Last year alone, borrowers paid $ 104 billion in interest. What is debt snowball?
Using the debt ball, you calculate all your debts based on your balance of receivables. You make the minimum payment for each card. Then you put any extra money on the card with the lowest balance. Importantly, you don’t take into account the interest rate of each card. Instead, you focus on perfect balance.
The theory is that by focusing on the smallest balance first, you will pay it back quickly. This, in turn, will motivate you to continue paying off your debts. After paying off the smallest debt, you direct the money you paid off that debt to the card with the next smallest balance. This process continues until the entire credit card debt has been paid off in full.
What does the debt snowball on?
Depending on your personality, paying back a small amount of debt before dealing with larger bills can be a big incentive. For people who care about their finances, this can be a great strategy.
The theory here is that you have a small win in advance. You can often pay off your smallest debt in just a few months. In addition, before you start concentrating on the debt with the largest balance, you’ll spend huge amounts of money on it every month. This can make incoming student loans or your mortgage balance less intimidating.
However you want to start earning even the smallest debts, it should be noted that a rigorous monthly budget with a convenient rescue fund is the cornerstone of the entire Ramsey philosophy. Without them, the smallest bump on your way to repayment can cause serious setbacks.
What do you have to do?
After allocating every dollar in your budget and collecting the emergency fund buffer around your finances, exchange your debts from smallest to largest. Do not pay attention to interest rates or payment terms; the only important value at the moment is the total loan balance on each account.
Another great way to prepare for success is to look at refinancing student debt. Like the debt ball method, proper planning and smarter refinancing loans allow you to go through the repayment process in the most efficient way. Student loan rates are approaching the lowest level ever, and the consolidation of many student loans into one fixed rate loan ensures that you have done everything you can do to simplify this particular part of your finances.
Finally, remember that getting out of debt requires much more than choosing a debt repayment method. This also includes budgeting, refinancing debt at lower rates and lifestyle changes. This may even require you to improve your credit standing to qualify for a 0% credit card. So remember about a comprehensive approach to paying off your debt.