Snowball your way out of debt
1 commentDebt advice is everywhere: "helpful" consolidators for debt management, government-funded financial support, independent advice centres; there seems to be no shortage of people telling you what to do, whether you're paying off your credit card each month with little problem, or dealing with debts comparable to your average Third World country.
However, for those of us who fall between these two camps, and are trying to pay off large sums in the most economic way possible, there's a great online tool, curioustly titled the Snowball. This clever little calculator on whatsthecost.com, a website set up to help consumers wrest back control of their finances with free money management tools, helps debtors prioritise and track their debts as they, hopefully, dwindle.
The concept of snowballing debt is fairly simple - target the card (or loan) which is costing you most, and focus on repaying that first. Once that debt is cleared, you can move on to the next most expensive debt, and so on. As an example, let's say you have £2,000 outstanding on a credit card charging 14.9% APR and a further £3,500 for which you are being charged 6.9%. With £400 per month to put towards the debt, you could simply split the money between the two cards. At this rate, it would take you 11 months to pay off the first debt, and a further four months to clear the second debt. You would pay a total of around £285 in interest. By snowballing the debt, you would still need 15 months to make the full repayments, but would save yourself £35 in interest charges. With a fairly simple example like this, the best course of action is fairly obvious. The more debts and interest rates involved, the more you will be grateful for the snowball calculator!
Another thing which makes a simple snowball a headache in practice is the fact that most lenders will require a minimum monthly repayment, whether that's a fixed sum or a percentage of the outstanding debt. Introductory interest-free periods and subsequent rate hikes all complicate the issue. This is where the snowball comes in handy. You enter all your debt details (the snowball can handle up to 20 debts), including the balance, rate, minimum repayment and other conditions, as well as the sum of money you have available each month for debt repayment. A click of the mouse then brings up your personal repayment plan, showing you which debt to target first and how long it will take until you are debt free. You can play around with the figures, as increasing the monthly repayments can have a dramatic effect on the speed with which you can clear your debt, not to mention the interest you will save.
Consumers with several debtors may be drawn to debt consolidation - one lump sum and a single monthly repayment can seem a simpler, more affordable solution. Use the snowball to calculate how much you would end up paying in the long run, however, and you may get a nasty shock. Affordability and improved cash flow in the short term come at a price. In the end, the most effective way to tackle credit card debt is not to put off the evil day of repayment, but to manage the debt more effectively over a period.
The snowball helps you achieve the first three steps which the Citizens' Advice Bureau suggests for those needing to tackle debt:
- Step One - make a list of your debts
- Step Two - work out your budget
- Step Three – sort out your priority debts
Start the snowball rolling now and, in conjunction with responsible spending and realistic budgeting, you might find yourself debt free sooner than you thought.
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