A Simple Debt-Repayment Plan

In a perfect world, none of us would have to rely on credit cards or loans. Everything would be paid in cash. In our grandparents' day, they neither wanted nor relied greatly on credit. If they couldn't afford it, they wouldn't buy it. Today is a different world, however, and the current economic downturn is a direct result of rampant mortgage foreclosures and unpaid credit. If you owe money on your credit cards and are only making the minimum monthly payments, you may be wondering when (or if) you'll ever be free from debt.

There is a method widely used today that can offer you the opportunity of a debt-free life sooner rather than later. It goes by many different names, but the procedure is essentially the same. We'll call it the Debt Snowball. It's been highly recommended by experts in the financial field and has helped many individuals who were drowning in debt.

How does the Debt Snowball work? Basically, it's a method by which you pay off your credit cards or loans in the order of the interest rate they carry, with highest interest first. To begin the process, you have to make a list of all your debt by interest rate. Then, you'll need to ascertain how much money you can put toward paying off the debts. This will, of course, depend upon your total monthly expenses (a good budget will help immensely here).

For example, let's assume that you have four credit cards. List them one-by-one, starting with the highest-interest-rate card first, then the next highest and so on, with the last item carrying the lowest interest rate. Take any extra money (according to your budget) and add it to your minimum monthly payment for the highest-interest-rate card. Only pay the required minimum amounts on the other cards you have listed.

Now, once you've completely paid off the first high-interest-rate credit card, proceed to the second one on the list. Apply the same method by paying the minimum amount due for this card, but add to it the amount that you were paying toward the first card which has now been freed up since that account is now paid off (the first card's minimum plus the extra money from your budget). Continue to pay the monthly minimum on the third and fourth credit cards.

After you've paid off the second credit card, continue on to the third with this method (the third's minimum plus the total amount you were paying toward the second), and then on to the fourth. You'll find that with each subsequent credit card, the amount you pay toward the particular debt will continue to grow in size, but you won't be paying any more per month in total. As long as you maintain that initial amount taken from your budget, you should be able to pay off each card in an expeditious manner. Why pay off higher-interest debts first? It's really quite simple. Your overall savings is greater by decreasing first the debt that continues to grow at a faster clip due to the higher rate of interest.

Many people have used this method to achieve a debt-free life. But, make no mistake; it will take determination and motivation in order to faithfully execute the plan to the end. High interest rates are the bane of our society. By firmly committing to a proactive debt-repayment strategy, the weight you've been carrying will be lifted, and considerably sooner than you might have thought.

blog comments powered by Disqus