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Debt Reduction:The Snowball Method
The debt-snowball method is a debt reduction strategy relevant
mostly to paying off credit card debt. It has gained popularity over
the years mostly due to its promotion by national radio host, Dave
Ramsey.
Here are the basic steps:
1) List all of your debts in order from the smallest balance to the
largest balance. This is the most unique feature of the methodology.
Most debt reduction strategies emphasize the importance of paying
off credit cards with the highest interest rate first.
2) Make a commitment to pay at least the minimum on each debt.
3) Add up all of your monthly income. Add up all of your monthly
expenses. Determine how much surplus income you have.
4) Make the minimums on all your debt and apply your surplus income
to the smallest balance until it is paid off.
5) Make the minimums on all your debts, apply your surplus income
andthe minimum payment from the account you paid off to the next
smallest balance.
6) Continue process until all debt is reduced and eliminated.
The name comes from the fact that once the final debts are being
paid, the extra amount paid to the larger balances will grow
quickly, much like a snowball rolling downhill gathering more snow.
What makes this debt reduction strategy distinctive is the fact that
it relies more on human psychology than finance. After all, the
logical way to reduce debt is to pay down the highest interest
credit card first, but as proponents of the debt-snowball argue,
this methodology rarely works because it’s very easy to lose
momentum.
Disadvantages -It is not a legitimate bankruptcy alternative;
not enough debt relief for consumers who are seriously overwhelmed.
For individuals who are seeking ways to reduce debt to avoid
bankruptcy, this strategy is largely ineffective because it assumes
you can afford a substantial amount more than your minimum monthly
payments. Debt settlement or debt negotiation may be more
appropriate if you fall under this umbrella.
-It is too illogical for some. Another important feature of the
debt-snowball strategy is you are supposed to stop any retirement
contributions during the plan to free up more money for paying down
the debts. Many financial experts dispute this idea citing the fact
that the potential gains from tax-deferred, compounding interest is
greater than the benefit from paying high interest credit card debt.
If you would like to learn more about our credit card debt reduction
strategy, please feel free to call (877) 274-1260 or
fill out a form
and we’ll contact you as soon as possible.