How To Pay Off Your Debt Using The Snowball Effect
The Snowball Effect Review
The Snowball Effect is a very popular method of debt repayment that was originally introduced by financial guru Dave Ramsey. Dave Ramsey is known for counselling those people who have become stuck in mountains of debt that they can no longer negotiate their way free from or at least they believe that their situation with their debt is nearly hopeless and that they will never be able to pay that debt off. The Snowball Effect takes all the aspects of your personal debt into account: The plan will depend upon your balances, and you will implement the plan in your own unique way based on what you owe to which creditor.
The Snowball Effect is so named due to the fact that once debt repayment begins, in gathers momentum: You begin by paying off one smaller debt, then that debt repayment increases your financial ability to pay off the next debt, and so forth. Just like a snowball, the debt repayment gains power as it continues rolling! There are many people who are strong advocates of the Snowball Effect, however there are also some who feel that there are other more effective debt repayment strategies available. In this article we will be explaining the Snowball Effect in detail and talking about the pros and cons of the Dave Ramsey method.
How Does The Snowball Effect Work?
Dave Ramsey recommends that the initial phase of the Snowball Effect is stopping all payments on credit cards, except for the minimum payments. The idea is that by trying to pay extra money towards a number of different cards at one time, the debt repayment effect is diluted. The recommendation is to stop all except the minimum amount to each card, and then use all of the money that was formerly going to paying more than the minimum for one single purpose. Basically, instead of trying to pay a little bit extra on a lot of different credit cards, you will be paying a lot extra on one single card.
How To Pay Off Your Debt Using The Snow Ball Effect
The card that you will be focused on in the initial phases of the Snowball Effect plan is the credit card with the smallest balance. Even though this might not be the card with the highest interest rate, Ramsey cautions against concerning yourself with interest rates at this stage of the plan: Simply select the credit card that has the lowest total balance, and begin applying all extra funds to that card first, while still paying the minimum payments towards all of the other credit cards.This will continue until that debt has been fully repaid.
Once that first debt has been eliminated, you will move on to the next smallest debt. All of the money that you were formerly paying to the first debt can now be applied to this debt, while still continuing to pay the minimum balance due on all other cards. The repayment snowball will continue in order, paying the debts smallest up to largest.
Ramsey says that the only time interest rates need come into play is if two debts are similar in size: In this case, you would pay the credit card with the higher interest rate first. The Snowball Effect will eventually culminate in the total repayment of all debts, with living debt free as the ultimate goal.
The Pros Of The Snowball Effect
Supporters of the Snowball Effect praise its simple plan. Virtually anyone can understand and implement the Snowball Effect debt repayment plan, even if they do not have an in-depth understanding of financial details like annual percentage rates and even if they are far from being a financial expert. The plan can help a person to get out of debt in a fairly rapid fashion, especially if you have realized that there is a debt problem early on. The Snowball Effect allows its users to feel a real sense of accomplishment as they wipe out their debts in order, and this feeling keeps motivation high to continue with the plan and to eventually wipe out debt completely.
The Cons Of The Snowball Effect
The Snowball Effect may not be a perfect debt repayment plan for everyone. Detractors of the Snowball Effect say that the plan may not be financially ideal: Rather than paying off the highest interest debts first, the Snowball Effect pays off the smallest overall debt first — no matter what the interest rate of that particular debt is. This means that users of the Snowball Effect plan will continue to pay high interest on credit cards for longer than they might otherwise have to. For example, if the largest debt is also the highest interest debt, this can add up to a great deal of money in finance charges. However, the Snowball Effect plan user will have to continue to pay this high interest rate until they work their way up to paying that largest debt.
Is The Snowball Effect The Plan For You?
The Snowball Effect is very effective for millions of people, but are you one of them? The suitability of the Ramsey plan for you all depends on what your goals are. Do you want to completely eliminate debt from your life? Do you feel overwhelmed by the amount of credit card debt that you find yourself in? One very important question to ask yourself about the Snowball Effect is simple: Are you ready to give up your credit cards?
Any effective debt repayment plan, including the Snowball Effect, will require you to stop using your credit cards. After all, if you are continually adding to the balances of your existing credit cards or adding new cards to your wallet — you are not going to be able to effectively follow the Snowball Effect or any other plan. Once you cut the credit cards from your life and focus on paying them off rather than using them constantly, you will be surprised how very quickly and effectively you can pay your debt down for good! Overall, the Snowball Effect is generally considered one of the most efficient ways for any person to get out of debt fast. This is also seen as an alternative to debt consolidation loans.
Here is Dave Ramsey explaining the Snowball Effect in the video below. Must see, enjoy:
Different Ways to Consolidate your Credit Card Debt
Learning of ways to consolidate their mounting credit card debt is one of the best things that cardholders can do. Credit card debt consolidation not only helps you in getting rid of your debts and high interest rate that you pay every month, but also helps in improving your credit score. If you have plans for consolidating your credit card debt, then you should consider few things before doing so. We are providing few tips that will guide you in How to consolidate your credit card debt.
Why Consolidate your Credit card Debt?
Well, there are various reasons for consolidating your credit card debt. The biggest being the improved rates. If you can get much better rates on consolidation, then there is no reason why you should not consolidate. With consolidation, you can significantly reduce your monthly outflow and save more for your household expenses.
The easiest way for you to ascertain whether to go for consolidation or not is to note down interest rates from each of your cards and then compare it with the new rate. If this new rate is lower that the average of the older rates, then credit card debt consolidation makes a perfect financial sense for you. If you have few cards that have lower interest rate, then you need not include them in your consolidation.
Aside from this, people like to consolidate their credit card debts because they are interested in making their lives simple. Instead of making multiple payments every month at a high interest rate, they have to make just one payment at a much lower rate of interest.
Consolidation also offers a great chance to all those who are involved deep in credit card mess to get out of it with ease. By consolidation their debts, they will be making lower monthly payments than they would if they had done nothing at all. By successfully closing their other accounts, their credit score will show marked improvement. For these very reasons, many people today are interested in knowing of ways on how to consolidate your credit card debt.
So, how to consolidate your credit card debt?
Well, there are many ways to do that, and we are discussing few promising ones for your benefit:
1. Debt consolidation loan – You can consolidate your credit card debts using a debt consolidation loan. However, these loans are not always available to all, and you will have to consult a suitable debt consolidation company to see if you are eligible for this loan.
The biggest benefit of debt consolidation loan is that it pays off all your high interest credit card debts in one go and then you have to make just one low interest payment every month towards your debt consolidation loan. Another benefit of opting for credit card debt consolidation loan is that your repayment term is extended considerably, due to which your monthly outflow reduces to a great extent.
You can get debt consolidation loan as secured consolidation loan and unsecured consolidation loan. Secured consolidation loan is available to all those who can offer some collateral to the lender. The main benefit of this loan is that it comes at a lower interest rate and a longer repayment period. If one has a good credit score, then interest rate is further reduced by the lender in few cases. Unsecured credit card debt consolidation loan is available without any collateral but comes at a high interest rate. Their repayment period is also short.
2. Home equity loan for credit card consolidation – If you own a house, you can get a home equity loan for consolidating your credit card debts.
3. Personal loan for consolidation – All those who are renters and have no property can easily lower their credit card payments by getting a personal loan. These loans are also available as unsecured personal loans and secured personal loans. In unsecured personal loan, you will not have to offer any collateral to the lender. This is usually available to all those who have good credit score. Secured personal loans come at much lower rate of interest and are secured against some collateral such as house, car, or other valuable items.
Turn to professionals
When you are thinking on how to consolidate your credit card debt, you should hire the services of a reputable and experienced professional. You can research on such companies on the Internet. You should ensure that there are no hidden charges in the debt consolidation plan that you are considering. With proper research, you can save considerably money for your future.
Are You Eligible For Debt Consolidation?
Given the current economic scenario, it is not uncommon to find people struggling with expenses of keeping body and soul together. Many have lost their jobs or live in constant fear of losing the ones they have. Add to that other problems such as skyrocketing fuel prices, and bankruptcy, and this means that being under debt is no longer the cakewalk it once used to be. In such a situation, it is critical to monitor your financial situation. It is not easy to find help if you are saddled with debt, but many solutions exist to help you free yourself from the embarrassment of having creditors at your doorstep.
One of these options is debt consolidation, which should be your first choice if you have more than two to three loans in your bag already. Debt consolidation refers to simply converting unsecured loans into secure loans, typically by buying stock or stock options, to help to pay off liabilities (i.e. your debts). All you do is take out one single loan in order to satisfy multiple creditors.
Entering into debt consolidation not only helps you to save a great deal of money, it also has the advantage of helping you pay off your debts once and for all. An added perk is that banks and lenders are usually very agreeable to lending money for debt consolidation purposes, helping to convert it from an unsecured loan to a secure one. To make your life easier, you also have the option of applying for debt consolidation online and several lenders offer these services on their websites as well.
Thanks to facilities such as these, it has become increasingly common to pay out multiple loans, such as your car loan, property loan, college loan, etc, all paid out in a single go, even including their credit card loans in this amount. You thus owe only a single company money, which even helps you to remember who to pay and how much to pay.
Any company, business or institution that deals in debt consolidation usually employs a consultant or risk officer who is responsible for calculating and assessing the risk involved, and contacts the companies involved to help to waive off your debts to them and to reduce your liabilities. This may even result in a reduction in the amount you ultimately need to pay.
But, simple as it may sound, it is not easy to qualify for debt consolidation loans. In fact, there many requirements you need to fulfill before you are even allowed to apply for it. First of all, it is necessary that you have a steady income, irrespective of amount. This helps you to get loans at attractive rates, since the risk officer can be assured that you possess the means to pay off your debt. Secondly, you must possess a decent credit rating. Like the previous point, having a great credit rating reflects on your ability to pay off your loans on time and without defaulting on them. This in turn helps you to get attractive rates and softer terms. This also means that someone who does not possess a history of default has a greater chance to be approved for debt consolidation. Finally, the credit rating of your spouse is also examined. If you fail on the above criteria, the risk officer will examine the income stream of your partner or spouse, and this may help you with your application as well.
Before approving you for debt consolidation, the loan officer will also examine the kind of loans you have incurred, since not all of them can be consolidated. You should remember that there are three basic kinds of debt: secured, unsecured and government. Secured debt includes debt that is backed by some sort of collateral, such as a mortgage. Unsecured debts are not backed by collateral, and include, for example credit card debt.
Government loans include taxes and student loans. When a loan officer is appraising you for debt consolidation, he or she will first examine the extent of your unsecured debt. They would typically look at credit card debts and unsecured bank loans. They would not consider secured debt or government debt since both are ineligible for debt consolidation. The amount of the unsecured loan would ultimately decide first whether it would be of any advantage for the risk offer to extend a debt consolidation loan to you, and what would be terms and conditions.
Knowing When Debt Consolidation is Not a Good Idea
When it comes to the consumer led recession, South Africa has yet to shake off the weight of this burden since 78% of the ratio of debt to income is still way too high. Plus, if you combine that with the holiday time that furthers the debt, there are now a lot of people out there that are considering debt consolidation. With the current debt situation in this country causing a lot of concern about economic growth. However, before panicking, people need to understand that not all debt is bad and that they should know when debt consolidation is not a good idea.
For instance, if a company or an individual has gotten into debt over something that is going to only increase in value in the future, this is considered good debt and this would be when debt consolidation is not a good idea. Of course this does mean though that you will need to make sure that you do have enough cash flow to pay off this kind of debt.
When a person accumulates debt and they begin to feel like their repayments are beginning to hamper their personal incoming cash and they start feeling like they aren’t going to be able to pay their debts back on time generally leads to panic. This panic leads to uncontrolled tension and stress which then can lead to the inability to make a rash and logical decision. This again would be a good example of when debt consolidation is not a good idea. You need to make sure that you are thinking logically before you make such a decision or not.
This kind of panic then can also lead to a person simply deciding to ignore all of their debts until they are not only out of control but they also now have become burdened with the fact that their credit providers aren’t going to be as willing to work with them. However, you can avoid a situation like this by simply getting in touch with your credit providers and let them know what’s going on. They are far more receptive to accepting smaller payments than not getting anything at all.
As much as the idea of debt consolidation sounds good, you need to understand that it’s not a permanent fix with what’s wrong. It’s important to note that if you have problems making payments on most of the things that you owe on, then this is when debt consolidation is not a good idea either. It’s only going to work for the person that can continue to make monthly payments without experiencing hardships paying and then causing them to miss payments. It does no good to consolidate your debts if you still aren’t going to be able to make your payments on time.
If you own a home and already have a second mortgage on it, you might believe that this could be the time that you might want to go and try to get some debt consolidation done. But, this is also when debt consolidation is not a good idea. The reason is that if you end up failing to keep up with your payments you may even end up actually losing your home because of it.
If you are the type of person that once they see the amount on their credit cards lower or gone, you then feel like it’s safe to go ahead and start using the cards some more, this is when debt consolidation is not a good idea. This type of loan will clear up your credit cards but just because it does this does not mean that you should go out and build up even more debt. If you are unable to control yourself in your spending habits, it’s not a good idea to think that debt consolidation is going to do you any good.
If you don’t have the skills to change your lifestyle of spending on your own this is also when debt consolidation is not a good idea and you are more than likely not a very good candidate for this kind of a resolution. You might just be better off going to someone that offers credit counseling instead. You may need help learning how to control your spending and how to work with creditors as well as how better to manage the cash flow that you have coming into your home.
How To Borrowing Money Responsibly
In life there are times when we need to borrow money in order to cover an expense or make a purchase that requires more capital that we have on hand. Sometimes this can mean a mortgage for a house or a loan for a car, other times a personal loan to cover some unexpected expenses. Unfortunately many people fail to consider all of the financial ramifications that a loan will have for them. By learning how to borrow money responsibly people can help to avoid the issues that cause them to default on their loans. When making decisions about borrowing money it’s important to consider your ability to repay the loan, the purpose of the loan, and what kind of interest rate you will be receiving. By considering these factors and making an informed decision you can be certain that you are acting in a responsible way when borrowing money.
Learning how to borrow money responsibly means planning ahead and determining how the payments you will have to make will affect you. This means that you need to make a budget that takes into account your income, current expenses, and the proposed loan payments. Do you have enough income to cover your current expenses and the additional loan payments? Will you still have enough money to cover living expenses such as food, clothing and other incidental expenses? Have you considered debt consolidation loans? If you answered no to either one of these questions you shouldn’t even be considering taking out this loan.
Making a rash decision because you want a new car or have found a house that you just can’t pass on is a sure way to put yourself into a financial bind. Sometimes you find yourself facing an unexpected expense and need a loan to cover it. In these cases you are much more likely to make quick decision without planning out a budget. Even when you desperately need a loan you need to consider the long term financial consequences. If you cannot afford the payments then this loan is only a temporary fix that will lead to more financial difficulties in the future. If at all possible you should try to find an alternative way to come up with the money, or a loan with payments that are more affordable.
Learning how to borrow money responsibly also means borrowing money only when it is necessary. Are you taking out a loan on an expensive car that you really don’t need? Are you using credit cards to make purchases that can wait? If you answered yes to these two questions then you aren’t making intelligent choices. With the economy struggling all of us face an uncertain financial future. While you might be able to afford an expensive car payment today, an unforeseen change in your financial situation could prove to be a disaster. What if you were to lose your job? Borrowing money for optional purchases is not a good idea.
This doesn’t mean that you need to deprive yourself of the things you want, it only means that you need to be smarter about how you approach borrowing money for them. Why not save up the money instead of using a credit card? Of course saving up enough to pay cash for a car isn’t realistic. But what you can do is make sure that you have enough of a savings account built up to cover your expenses for several months before you take out a car loan.
Learning how to borrow money responsibly also means looking at all aspects of a loan. How much is your interest rate? How long will you be making payments for? How much will you ultimately be paying for your purchase when you combine the principle and interest? Too many people only look at the amount of the monthly payment and not the term of the loan or the interest rate. Sure you can afford R2000 a month, but what if that R2000 a month adds up to three times the purchase price over the term of the loan? When you stop and look at the bigger picture you can get a better of idea of how you are spending your money. Remember that irresponsible borrowing leads to defaults on loans, which in turn leads to additional financial hardships. Defaulting on a loan hurts your credit, and you may also be looking at wage garnishments in the future. Don’t run the risk of facing a financial disaster, make informed and intelligent decisions when borrowing money.
