To get out of debt fast the best financial strategy is to pay off your highest interest rate debts first. This lowers your interest costs, allowing you to pay off your debts sooner. But if you are overwhelmed with the thought of repaying all that debt, another debt reduction strategy is to use the snowball method.
Here’s how it works.
- Make a list of all your debts and the amount you owe on each. No need to worry about what the interest rate is.
- Make the minimum payment on all debts each month. You should never skip payments on any debt as this has a negative affect on your credit rating.
- Prepare a budget and find out how much extra, on top of your minimum payments, you can afford to put towards debt repayment.
- Start with the SMALLEST balance debt. Put that extra cash towards paying off this debt first.
- Once the smallest debt is paid off move on to the next largest debt. Apply the full amount you were paying on your last debt (both the minimum and extra payment) towards your next debt and so on up the line until all your debts are all paid off.
- As each debt is paid off, the amount you apply each month to your next debt increases since you will be adding all the minimum payments from paid off debts to your next debt.
- As you pay off each debt, close the account (or cut up the credit card) so you don’t run up any new balances.
Why does this method work? Because for some, the incentive of having quickly reduced a debt to zero is very inspiring. If you can afford it, snowballing is one of the most effective ways to repay your debt.
If you don’t have enough money to snowball, it’s time to contact a debt expert about your debt relief options. You may need to try a debt reduction program like a consumer proposal.