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Understanding Whether 'Debt Snowballing' is a Good Idea

If you have more than one unsecured loan, credit card or department store charge account to pay off, you may wonder whether you'll ever clear your debts in order to improve your credit score. Unless you have a strategy in place to repay your creditors, it's possible that you may continue to make minimum payments for years without seeing much progress. Debt snowballing is a strategy that many debtors have used to free themselves financially and recover their stability. To determine whether this method is a good idea for you, consider the benefits and drawbacks of snowballing.

Advantages of Debt Snowballing

Debt snowballing involves paying off the loan or credit card with the highest interest rate first, whilst making minimum monthly repayments on your other debts. Rather than attempting to repay all of your creditors at the same rate at once, you dedicate all of your available financial resources to paying off the account that's costing you the most money in interest. Using this strategy, you can save a considerable amount of money in interest over time.

After you've paid off the account with the highest interest, you'll have more cash left over each month to pay off the loan with the next highest interest rate. When that debt has been repaid, you'll proceed to the account with the next highest rate, and so on, until you've cleared your debts. As you pay off a credit card, your monthly minimum payment will decrease, but in order for snowballing to be effective, you must make more than the minimum monthly repayment.

Debt snowballing offers several important advantages, primarily the opportunity to save money. Because you attack the debts with the highest rates initially, you'll end up reducing the total amount you pay in interest. As you pay off one debt after another, you'll feel more motivated to continue with this strategy. Snowballing gives you a structured repayment strategy that can prove quite effective if you're dedicated to clearing your debts. Many debtors have used this strategy to avoid more expensive debt solutions, like consolidation loans and fee-based debt management plans.

Disadvantages and Alternatives

Some consumers feel more motivated to pay off their smallest debts first, rather than focusing on high interest debts initially. Paying off a debt, even a small one, can give you a sense of accomplishment, which may spur you on to pay off the next largest account. If you have enough disposable income to pay off your creditors, but you're discouraged about having so many financial obligations, getting shot of any of your debts may give you the encouragement you need to carry on.

If you're overwhelmed by debts and you have difficulty keeping up your minimum monthly payments, debt snowballing may not be effective. If you miss a payment or are late paying off an account, you may be stuck with higher interest rates and late payment fees. Snowballing your debts won't work unless you have enough disposable income to make higher payments on your high interest debts, whilst keeping up minimum payments on your other loans.

Understanding whether 'debt snowballing' is a good idea requires a comparison of your alternatives. Debt management may be a more appropriate solution if you've fallen behind on your repayments and are having difficulty covering basic necessities. Free debt advice is available through your local authority, through national charities or through fee based companies. With a debt management plan, you can make arrangements to repay your creditors in affordable installments over a set period of time. Regardless of the solution you choose, clearing debts requires adequate financial resources and a sense of commitment.