Credit Where It’s Due: How to Avoid Financial Avalanche by Snowballing Debt

It’s hard to believe that while debt is a primary worry for many people, an astonishing 21% of Americans don’t know whether or not they even have any outstanding balances. Yet that’s exactly what the U.S. News & World Report discovered in May of this year when they surveyed 1,000 consumers about how much money they owed banks, schools, and other institutions.

Odds are good, however, that if you’re reading this article, you’re not only knowledgeable about your debt situation, but you’re also eager to escape it. Fortunately, a few of today’s leading authors have valuable insights to offer about how to pay off debt and maintain a positive cash flow for the foreseeable future.

The Dangers of the Debt Trap

“You must gain control over your money, or the lack of it will forever control you.” — Dave Ramsay

According to a May 2019 study conducted by The Balance, the average American household has $8,402 worth of credit card debt. That’s an astonishing 8.2% rise compared to the previous month of April!

Given the number of credit card applications most Americans receive in the mail each month, coupled with the fact that more than half of all adults in this country have less than $1,000 in their savings accounts, it’s perhaps no surprise that so many consumers are drowning in debt. Yet despite the damage this does to many families’ finances, credit card companies and other lenders continue to intentionally exploit Americans’ spending habits in order to boost their own bottom lines.

This seemingly never-ending cycle leads millions of Americans to become so over-encumbered by debt, that owing a tremendous amount of money has begun to feel like an inescapable eventuality. There is hope, however. By adopting a smarter approach to managing money, Americans can evade the owe-pocalypse and avoid credit card debt for the rest of their lives.

A Smarter Way of Paying Off Debt

“Winning at money is 80 percent behavior and 20 percent head knowledge.” — Dave Ramsay

If you’ve found yourself in a position where you’re receiving an onslaught of credit card bills each month, don’t despair. By changing the way you think about debt, you can reduce your balances bit by bit and continually improve your overall financial condition.

In The Total Money Makeover: A Proven Plan for Finance Fitness, author Dave Ramsey offers straightforward advice and actionable steps you can follow to improve your financial situation. For those burdened by several balances, such as student debt, credit card debt, or auto loans, Ramsay outlines a strategy called “snowballing,” which involves building momentum by paying off accounts with the smallest balances first. The name is a play on how snowballs can accumulate snowflakes and grow in size while rolling along snow-covered ground. Here’s an overview of how the technique works:

• Begin by listing all of your debts in order of the amount owed. This list should include everything from an unpaid parking ticket to the balance of your mortgage and everything in between.
• Next up, make a commitment to pay off these debts from the smallest to the largest. In order to do so, pay the minimum amounts due for each of your bigger balances and devote the entirety of your remaining funds to the smallest debt.
• As your smaller balances begin to disappear, you’ll gain confidence in your ability to erase larger outstanding debts, empowering you to tackle your bigger bills.

Rolling a debt snowball is a proven way to pay down debt, but it’s far from the only tactic to use on your journey toward financial freedom. Below, you’ll discover a few more ways to manage your money effectively and escape the debt cycle for good.

How to Pay Off Debt Even Faster

“We buy things we don’t need with money we don’t have to impress people we don’t like.” — Dave Ramsay

To further relieve you of the stress that comes with decreasing debt, here are some simple tips you can use to manage your money more effectively and start living a debt-free life as quickly as possible.

Quit Paying with Plastic

In The Index Card: Why Personal Finance Doesn’t Have to Be Complicated authors Helaine Olen and Harold Pollack explain how many credit card companies intentionally entice consumers to rack up massive debts. This is because the lenders reap the bulk of their profits from the high-interest rates they charge their customers. And because studies have shown that people will spend up to 20% more with credit cards than they would with cash, the authors argue that consumers should avoid using credit cards completely.

Prioritize Debts with Higher Interest Rates

The authors of The Index Card also explain why consumers should focus on paying off debts with high-interest rates immediately. If you’re not sure how much interest your lenders are charging you, it’s generally as easy as calling them or accessing your account online to find out the exact percentage. This tactic doesn’t necessarily go against the snowballing method, but if you have two debts that are similar in size, make a point of paying the one with a higher interest rate first.

Negotiate Lower APRs

In Get a Financial Life: Personal Finance in Your Twenties and Thirties, author Beth Kobliner underscores the cost of using credit cards and the value of negotiating a lower interest rate with your lenders. Say, for instance, that your household has $8,402 worth of credit card debt (the national average) and you’re paying 17% interest on that amount. If you only pay off $168 (2% of that debt) each month, it will take you 88 months to pay off the amount in its entirety. That’s more than seven years! This is why it never hurts to contact your lenders and request a lower interest rate. If you have a decent history of paying your bills on time, odds are you’ll be able to shave a few percentage points off your annual percentage rate (APR).

Tap into Your Savings

Although many of us are taught not to touch our savings accounts unless there’s an emergency, sometimes dipping into your safety net is the most sensible way to escape debt. That’s among the other bits of advice offered in Get a Financial Life — and the rationale makes perfect sense. If, for instance, you have $5,000 of credit card debt with a 17% APR, and you also have $5,000 in a savings account earning only 2% interest, your debt will obviously grow faster than your nest egg. That’s why sometimes it’s best to bite the bullet and drain your savings in order to eliminate your outstanding balances and move on with your life.

Transfer Balances to More Affordable Accounts

Another effective strategy highlighted in Get a Financial Life is taking advantage of balance transfer offers — also known as debt refinancing. Basically, this process boils down to moving balances from high-interest accounts to lenders that offer lower, more affordable APRs. After all, why continues to pay 23% interest on a debt when another lender will only charge you 13%?

Learn More About How To Start Snowballing Debt

“Live like no else today, so you can live like no else tomorrow.” — Dave Ramsay

Hopefully, you now have a better idea about how to pay off debt and achieve true financial freedom — but there’s always more to learn. To discover deeper insights about investing, retirement planning, and many other aspects of money management, dive into the key ideas from any of the above books or the scores of other financial titles in the expansive Blinkist library.

Originally published at https://www.blinkist.com.