How to Pay Off Debt Fast With Debt-Snowball Technique - A Case Study
How to Pay Off Debt Fast With Debt-Snowball Technique - A Case Study
Debt-snowball technique is a debt relief solution commonly introduced to people who are facing debt problem and want to see their debt goes off fast. It will not erase debt magically, but this solution that requires debtors to pay their extra dollars toward the smallest balance works psychologically that motivates them to work toward clearing their debt. Below is a case study that shows you how the technique is used to handle the payment of multiple debts and loans.
In our case study, Jane owes the following amounts of debt:
Credit Card A - $1500 balance - $125/month minimum
Credit Card B - $3000 balance - $150/month minimum
Credit Card C - $200 balance - $25/month minimum
Personal Loan - $3000 balance - $200/month minimum
Car Loan - $2000 balance - $150/month minimum
Jane earns $2500 a month, so after the deduction of her monthly expenses, she has some additional fund that can be devoted to repayment of the amount she owned. After reading the debt management tips and strategies, she has decided to follow the Debt-snowball Technique to make her debt goes faster with the additional fund that can squeeze out from her monthly income.
Under the debt-snowball technique, Jane has to list down the balances in the ascending order with the small amount on top of the list. If two balances have the same amount, then the balances with the higher interest rate will be listed first. In this case study, we assume the cards' interest rates are higher than the personal loan. So, Jane's list of balances is as below:
1. Credit Card C - $200 balance - $25/month minimum
2. Credit Card A - $1500 balance - $125/month minimum
3. Car Loan - $2000 balance - $150/month minimum
4. Credit Card B - $3000 balance - $150/month minimum
5. Personal Loan - $3000 balance - $200/month minimum
After deducting her monthly expenses, she has an additional $100 to be devoted to the repayment of debt. Jane will pay the minimum payment on her debt listed in item 2 to 5 and apply the extra 100 dollars on the balance of item 1, which she will pay $225/month for credit card C. In this case study, we assume that all credit card interest rates are 18%. Whereas, personal loan has15% of interest rate and car loan interest rate is at 6% per annum.
By doing so, Jane will settle the balance of credit card C after 3 months. At the 4th month, Jane applies the $225, which is used to pay the Credit Card C on Credit Card A. By payment $350/month on item 2, Jane will take another 5 months to get rid of debt on item 2.
On the 10th month, the car loan balance remains about $570. At this time, Jane has successfully gets rid of 2 debts. Now, she applies the $350 + $150 = $500 toward her car loan and successfully pay it off on the 11th month.
After clearing her car loan, she has extra money for payment on next amount owned. Without reducing the total amount used to pay her debt, she applies $650 on credit card B, which the balance at the time is about $2030. Jane takes 4 months to settle it.
Jane is getting excited because in less than a year, she manages to settle 4 debts. The motivation keeps ongoing. Now, with only one balance to go for, and the balance of the personal loan lefts about $910, it took Jane another 2 months to get rid of it.
Summary
This is the power of debt-snowball technique. If Jane just pays the minimum payment, her debt will take years to be settled, but by using this technique to clear the balance with minimum amount one by one, Jane settles her debt in 13 months.
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