The debt snowball method has become very popular as a mean of resolving debt problems. The method is efficient though it might not be the best. Yet, the economical and psychological effects it provides make it suitable for the average American debtor that has too much unsecured debt. Yet, debt consolidation is still a reasonable solution that can be combined with this method when you can not consolidate right away.
There are many situations when debt consolidation is not an option because the credit situation of the applicant is extremely poor or because the financial situation is also critical. When income is just not enough and there is no equity left to obtain a secured consolidation loan, debt consolidation might not be a feasible solution for the time being. Yet, you can start applying the debt-snowball method and when things improve you can resort to debt consolidation.
Debt Snowball Method Explained
This method is simple: You need to list all your debts assigning the lowest number to the smallest debt amount and then proceeding with the next debt till you reach the highest amount one. If two debt amounts are similar you should list first the one with the highest interest rate and costs. Note that as opposed to most debt reduction methods this method orders debts by amount instead of interest rate.
Once the list is ready you need to distribute the money you destine to debt repayment in such a way that you pay the minimum payments on all your debts. Then see how much money is left and how much extra money you can destine to repaying the smallest debt amount. Once the smallest debt is paid in full, you can use the extra money plus the amount that you used before for the canceled debt minimum payment to repay the next debt and so on till all debts are fully paid off.
The method provides both a financial solution to debt and produces the sensation in the debtor that things are looking up as debts are canceled sooner. Sometimes paying high interest debts first is economically wiser but does not provide the psychological benefits that this method offers since with the snowball method debt keeps being reduced in terms of amount of outstanding balances and the debtor realizes he or she has less bills to pay each month.
Combining The Snowball Method With Debt Consolidation
Some debts cannot be consolidated at all, and sometimes you need time to improve your credit before consolidating. In the first case, you can use the snowball method with non-consolidated debt while consolidating the rest of your unsecured debt into a single payment by means of a debt consolidation loan or with the aid of a debt consolidation agency.
In the second scenario, you can apply the method and it will slowly improve your credit as more and more account balances are canceled and timely payments get registered in your credit report thus improving your credit score. Eventually your credit score will get better and your income to debt ratio will let you obtain a debt consolidation loan or hire the services of a debt consolidation agency to speed up the process of becoming debt-free.