Snowball debt reduction plan – A myth
If your credit card debt has increased many times in past few years. Companies allowing minimum monthly payments for their balance of as little as 2% -5% of their principal, it has become easier for the people to purchase and keep their monthly payments to minimum amount.
Due to present financial hardship everyone is trying to get rid of their debt as fast as possible. There are many techniques to reduce your debt of which same are easy and some are not. One common method that most people talk about is snowball debt method. The common myth about the snowball debt method is that it gives faster feedback and helps you to stick to the plan.
How the snowball debt method works? While implementing the debt snowball method organizes your debt first. The debt which includes the pay off is credit card debt, pay-day loans, student loans, car loans and personal loans except mortgage.
First list all your debts in ascending order from smallest to largest debt. After you list all you debt then plan how much is possible form your income to clear debt. After you determine the total amount which you can afford for debt payment then you have to allocate each account the minimum amount. The debt snowball method says that you pay off the lowest balance debt first. By allocating the maximum amount to the lowest balance debt this allows you to pay off the smallest debt very quickly?
This strategy is simply allows you to pay some extra amount to creditors.
For ex: card I has balance of $8000 at 19.8% with minimum payment $160 per month
Card II has balance of $5000 at 5.9% at $240 monthly payment.
With snowball method card II makes 26.74 monthly and then card I take 21.06 months.
Total time taken to pay off = 26.74 + 21.06 months
Total pay off amount = $19120
If you pay the higher interest rate cards first then card I is paid off in 38.96 months.
The card II takes 5.39 months to pay off the remaining amount.
The total time taken to payoff is 44.35 months
Total pay off amount is $17740.
So the debt snowball method cost you extra $1380 out of you pocket.
With more people struggling under the burden of credit card debt using the debt snowball method in right direction is what the most important for you. Most of people have wrong information with snowball method to focus on paying the lowest balance first. But this is not the way; if you use to pay off lowest balance first then this would take longer time and cost you some extra amount out of your pocket. The best way to pay off your debt is to pay off the credit card with highest interest rate or annual percentage rate (APR) first. This is the most important because lower interest rate would stop accumulating your debt at higher pace which leads you to some amount and pay off the other debts as early as possible.
If you are tired of making payment to clear your debt then speak to credit counseling professional to help you overcome your debt as soon as possible.