With all the interest attached to
debt and penalties for late payments, most debt snowballs into an uncontrollable situation. The snowball effect, that is rapid accumulation, though, can be used to reduce your debt. The first step in any debt reduction plan is to stop accumulating debt and start accumulating a good payment record.
The snowball effect is a simple strategy of paying off small debt to open up more cash to pay off bigger debt. Arrange your debt accounts in order of lowest to highest (in terms of capital to be paid). Begin paying off the lowest debt first and as soon as possible. Once that debt is paid off, you will have more income available to pay off the larger debt without being tied down to the interest related to the smaller debt. Repeat this until you get your debt to a manageable level.
The effect is known as the snowball effect as the payment of smaller debt gives the debtor impetus to carry on paying debt while also freeing up some cash. The effect is more psychological, but motivates the debtor to continue the programme.
The problem tough with this type of debt repayment method is that it takes a longer time to pay off all your debt. The reason for this is that the interest is compounded on your larger debt. While you’re paying off the smaller amounts, the interest on the larger debt is continually being incurred. As a result you pay more over time as the interest accumulates.
Paying off the highest debt first, does indeed reduce the overall cost in interest paid, but most debtors fail to do this as they lose focus of the ultimate goal – paying off all their debt. Willpower is harder to generate than income for people deep into debt.