Getting Started Cleaning up Your Credit, the Debt Snowball
Before you can start paying off your debt, it is important to come up with a plan for debt repayment. If you have just one debt to worry about, then the best strategy is to start repaying as much as you can every month. You must keep doing this until you are debt-free.
If you are like a lot of others who are in debt, then you might have multiple debts. You must try to come up with the best repayment strategy that appeals to you and works well for your financial situation.
One method for repaying your debts is known as the debt snowball. You start repaying your debts in ascending order—starting from the smallest amount to the largest one. As you start clearing small loans, it will give you the motivation to keep going. You can start enjoying your small wins as you make your way to being debt-free.
You must start paying the minimum balance due on all your debts. Once you do this, divert all your extra funds toward the debt with the smallest amount. Once you clear this debt, all the money you were spending on this repayment can be diverted towards the small debt on your list. Keep doing this until you paid off all your debts. Regardless of the rates of interest payable, you must start with the smallest sum due and make your way to the largest one. If you ever played in the snow and made a snowball, you will realize that as the snowball rolls on the ground, it keeps collecting more and more snow and becomes bigger. So, every small debt you repay will free up sufficient funds to repay the debt.
Let us assume that you have four debts, and their details are as follows:
An auto loan repayable at 4.5% for $16,000.
A student loan repayable at 6.5% for $30,000.
A personal loan repayable at 8% for $10,000.
A credit card debt repayable at 21% for $7000.
So, you will start by repaying your credit card debt, which is at $7000. Once you repay this debt and have paid the minimum balance due for all the other loans, all the interest that was payable towards the credit card debt can be successfully redirected toward the payment of the other loans. So, you will start with your credit card debt, then the personal loan, auto loan, and finally the student loan.
This is a great technique to pay your debts, especially if you have several small debts. At times, it can be quite breathtaking and scary when you look at a major debt. It can also be the reason for losing your motivation. To avoid this, when you start clearing the small debts, the number of loans you have to repay will reduce. If you have five loans, and you repay two loans, the figure somehow looks more manageable. Instead of worrying about repaying all the five loans at the same time, you can concentrate on repaying the smallest ones, and then be left with only the major debits.