Welcome to part two of our week-long series of articles on how to eliminate your credit card debt. Today, we’ll be looking at how you can power up your debt crushing steps by snowballing debt
Let’s get one thing straight; you can slash time and money off you repayment schedule using the snowball method but it needs to be consistent.
What Is Debt Snowballing?
Snowballing is a relatively simple way of paying off loans It’s not just for credit card debt. I can be used on any form of loan that you have.
Here are the basics ideas behind a debt snowball:
Make A List
Write down all your debts, put them in a spreadsheet, write them on a piece of paper or import them into your favourite budgeting application. Car loans, mortgage payments, credit cards; make sure you have it all.
Work Out The Minimum Repayment
For each debt that you have, work out the amount outstanding, the interest rate and the minimum repayments
Do Some Basic Maths
What is the sum of your minimum repayments? Add all the figures together to find to the total minimum repayments for all your combined debt. Now start paying off your loans. Once the first debt it paid off in full take the money the you were paying toward that debt and add it to your payments on the next figure in your list.
Why The Debt Snowball Works So Well
As you reduce the loan amount your interest payments drop. Most credit card lenders calculate the minimum payment as a percentage of your outstanding loan figure. By keeping your minimum payment figure as a constant the speed at which your outstanding loan decreases gathers speed.
Once your first loan is paid in full, taking the payments from your first debt and applying them to the next accelerates the process even further. When the second loan is paid… you get the idea. Each and every month that you snowball forces your debt to crumble like a sandcastle being battered by the relentless waves.
How Money Can You Save Using The Debt Snowball?
Here’s an example of how much money you can save. I’m going to use some nice, round figures but the principles can be applied to any cards you may have:
Balance APR Minimum Payment
£1,000 10% £30
£2,000 15% £60
£10,000 20% £300
The minimum payments listed above assume that your minimum repayments are calculated at 3%. To get your own repayments simply modify the balance then multiply it by the minimum repayment figure (2%, 2.2%, 3%, etc).
The total monthly repayments in this example come to £390 per month. If you stick to a minimum repayment schedule for all debts is going to look like this:
Total interest payments will be £4,586
Your debt will be paid off in: 3 years 10 months
Do you really want to be in debt for that long?
Move Your Debt Snowball Into The Fast lane
The examples I’ve used are calculated using the absolute minimum figure for your repayments. What happens when you add a little more cash to the mix?
Let’s say you have an extra £50 per month spare in the coffers. How much time and money is this going to save you? Let’s have a look:
Total interest payments will be £3,806
Your debt will be paid off in: 3 years 3 months
The numbers speak for themselves. By paying off as little as £50 extra per month you’ll chop over 7 months and nearly £700 off your repayment schedule.
If you want to have a play around with figures from your own cards and loans the try out this snowball debt calculator app.
The Debt Hit List
In an ideal world you’ll use any extra cash you have to hit your debt where it hurts. Some financial guru’s don’t recommend this approach arguing that you should tackle the loan with the lowest balance first. The reasoning behind this is that you will get the loan paid off quicker. Without going into the full ins and outs, this approach may cost you thousands in interest payments.
By tackling your biggest debt first you’ll have more money to pay off the next largest loan once the first is paid off. Did you get that? It looked a little confusing to me too!
The differences in the time it takes to pay off your loans don’t vary massively but, at the end of the day, it’s your money.
The other point consider is 0% balance transfer cards. If you have interest rates 0% of £2,000 on one debt vs 2.2% of £1,000 which would you want to pay off first?
Flaws In The Debt Snowball Plan
What could go wrong? There are a few pitfalls for the unwary:
More debt. Stop using your cards. Stop applying for payday loans It’s easy to say but hard to avoid at times but you need to keep your spending down. Adding more debt increases your minimum repayments.
Emergency funds are essential and need to be considered. Unexpected bills can’t be covered unless you have a slush fund. Yes, you could use your credit cards to make an emergency payment but then you’re adding more debt to your woes.
Poor credit scores. Fact: a higher credit score will result in you being offered lower interest rates. Do everything in your power to raise your credit score otherwise you’re going to pay ever higher interest rates.
Work on your credit. With an improved credit score, you can often times get interest rates on your debt lowered. In the case of a credit card, it can be as simple as a phone call. With auto loans and home equity lines, it will likely require a refinance, but the savings can be substantial.
In the next article in our series on crushing credit card debt, we’ll look at Ways to Free Up Extra Cash that you can put toward your debt.