Win the “Snowball” Fight with Creditorsseilings | January 19, 2011
In January we often think more seriously about reducing our debt as we recover from holiday buying, make plans for the New Year, and think about paying taxes. For people who owe multiple creditors, it can be challenging to keep up with the payments. Sometimes there is not enough cash to pay all of them the amount needed every month. In such circumstances, it pays to establish priorities. Professionals suggest that some payments are more vital than others and give the following guidance:
Protecting family well-being
- Rent or house payment
- Child care
- Health insurance
- Car loan(s)
- Other secured loans
- Home and car insurance
Preventing or responding to legal action
When it comes to distributing scarce dollars among credit card accounts or other unsecured loans, there are some useful strategies to consider. First, stop adding to the debt load by using cash instead of credit for day-to-day purchases. Set an amount that your budget will allow for paying down your debt. Allocate that money to the various accounts. If at all possible, pay the minimum monthly amount for each account in order to prevent extra charges and escalating interest rates.
In order to reduce your long-term costs, you may choose a strategy that is sometimes called the “snowball” approach. That method involves allocating any extra money toward paying off one of the debts, and as that one is fully paid, shifting those dollars into the next one to speed up payment of that debt as well. The choice of which one to begin with is yours, of course. Personal finance professionals usually suggest that you start with the account that has the highest interest rate in order to get the biggest cost savings. Another approach is to repay loans beginning with the one with the smallest amount owed to eliminate debts (and creditors) most quickly.
There is a very useful tool to help you assess your accounts and see how you can achieve success in reducing your debt. The tool was created by Extension professionals and is free. PowerPay is available on the web. You will have to register by putting in your name and email address and creating a user name and password. Go to https://powerpay.org/ The instructions are simple and are included on the web site.