MInTheGap

My War On Debt: Don’t Consolidate Your Debt, Unless…

The technique that Dave Ramsey uses to coach people to get out of debt is called the Debt Snowball.

The reason that it’s called a snowball is because of the basic premise: that you have an amount of cash that you can spend to get rid of debt and as you pay one off, more can go to the next one. You pay minimums on all but one, and focus the extra on one until it’s gone. Then, you roll that amount onto the next (with the minimum you were paying) until that’s gone. Keep repeating until you’re out of debt.

There are two different kinds of Snowballs:

1. Pay the Highest Interest Rate Account First

This debt snowball algorithm tells you to list all of your debts by highest interest rate to lowest interest and pay off the one with the highest interest first. When that’s gone, move to the one with the next highest interest rate until it’s all gone.

2. Pay the One With the Lowest Balance First

This debt snowball algorithm tells you to list all of your debts by how much you owe, from least to greatest. You then pay off the smallest debt until you have paid them all off.

The first one tries to save you the most money by focusing on the cards that are costing you the most. The second one tries to take advantage of human nature– mainly, if we can declare a win (a minor victory in the war) then we are more likely to continue the fight than if we slog through the highest debt first.

Both of these want you to take advantage of momentum built by the fixed (if not growing) amount of money that you can put in and the rolling effect.

So, what did I do? I cut it down to two cards and rolled a majority of my debt onto a 0% for 12 months card and the rest I paid using the snowball. So, I got rid of the card with the smaller debt (cut it up, canceled it and then paid it off) and then started on the bigger debt. That’s part of the reason for the July 2007 deadline to get rid of my remaining debt– because that’s when the 0% runs out.

It is advisable? If you’re truly serious and can make the commitment, go for the 0%. I found I was throwing away $32 a month on the card before I moved, and that was money that would have helped me get out of debt! If you’re really bogged down with debt/have a poor credit rating, don’t do this. Work with what you have. Don’t call the credit negotiating services (it’s like declaring bankruptcy) and get out of that debt!

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