Struggling to pay down or pay off debt? You're not alone. Most Americans are shouldering about $30k in debt from credit cards, school loans, or car loans. And if you want to buy a home, too much debt can hinder mortgage approval. Fortunately, there are ways to get a handle on it. Check out this popular and effective method for quickly lowering your debt.
The Fastest Way to Get Rid of Debt and Get Approved for a Home Loan
The Debt Snowball Method
Changing habits is tough. But when you see that your efforts are making a difference, the chances are that you'll continue the course. That's the trick behind the "Snowball Method" for debt elimination --positive feedback.
The Snowball Method uses positive feedback to help you stick to your plan of paying off debt. Here's how that works: Conventional wisdom says to pay down the biggest debt first because it has the highest interest rate, and paying this one first will save you money in interest. However, reducing large debt happens at a snail's pace and it can be discouraging. This is the primary reason that many give up too soon.
With the snowball way, you focus on the shorter-term goal of paying off your smallest debt first. Since it's the easiest one to pay off, you'll get rid of the debt sooner, and the sense of achievement will motivate you to keep going.
How To Make The Snowball Method Work For You
All you need to do is make the minimum payment on all but your smallest debt. On the smallest debt, put as much towards the payment as your budget allows. Once it's paid off, work on to the next smallest debt, funneling the funds that you freed from the previous debt to tackle this new goal.
Let's look at an example with a school loan, car loan, medical bill, and credit card. First, list the amount owed from smallest to largest, such as:
- Credit Card: $1,000
- Medical: $7,000
- Car: $12,000
- School: $23,000
In this example, you'd start with paying off the credit card first, making the minimum payments on all other debts except the credit card. Let's say the minimum on the credit card is $65, but pay $100 until it's paid off.
Once you've paid off the credit card debt, you'd move onto the medical bill, rolling over the $100 you spent paying off the credit card into the medical bill payment. So your monthly medical bill payment would be the minimum PLUS $100.
Keep "snowballing" like this until all debt is demolished!
Why Snowballing Works
While it logically makes more financial sense to focus on eliminating the debt with the highest interest rate, emotionally, it's not as rewarding --and this is why many lose their motivation.
With the "snowballing," you rely less on willpower and more on the sense of accomplishment. This approach, as it turns out, is a lot more effective for sticking to goals.
Where to Find the Money to Eliminate Your Debt
If you're living paycheck-to-paycheck, you may be wondering where you can find the funds to add a little more to pay extra to your debt. Start by reviewing your regular spending and see if there are any areas that you can cut back --even if only temporarily --while you work on paying off debt. Also, see if there are ways to increase your income with a side hustle so you have more money to work with.
And remember that it's just as essential to avoid getting deeper into debt while working on paying down what you already owe. And of course, once you get out of debt, stay out.
You Don't Need To Be Debt-Free to Buy A Home!
Depending on how much you owe, it can take some time to get rid of your debt entirely. But that doesn't mean buying a home now is out of the question.
Your debt-to-income (DTI) is just one of the factors that determine your eligibility. Get straightforward answers from a local loan expert. Contact us to set up your free consultation.