Thursday, 23 July 2009

Prioritising debts and snowballing debts

posted by debts.org at 02:13

Now, more than ever before, there are a number of debt solution options to help improve your finances, including snowballing debts. You can get a better deal on your credit card debts by transferring them to a low interest or a zero interest card, or consolidate your debts by means of a personal loan, or even release some equity from your home by remortgaging. Whichever option you choose, the aim is the same. To free up some money to pay off your debts.

Prioritise your debts

If, however you are not in a position to do any of these things there are other options. Firstly you need to prioritise your debts. Sit down with a paper and pen, and work out which debts have the highest interest rates, and which ones are secured against your home, or could result in court action, such as none-payment of council tax.Pay more off the debt with the highest interest

Snowballing debts is when you arrange to pay at least the minimum payment for each debt, and pay more for the debt with the highest interest rate.

Throw as much money as possible at the debt with the highest interest rate, while still paying a small amount towards the other debts. Carry this on until the highest credit card debt has been cleared, and then start to pay more on the credit card with the second highest interest rate.


This method is known as snowballing, as the debts reduce quicker as time goes by.Snowballing your debts

Example

If for example you owe £1,000 with an Annual Percentage Rate (APR) of 22%, your minimum monthly repayment would be £50 per month.

If you owe £5,000 with an APR of 12% your minimum monthly repayment would be £150.

If you owe £10,000 with an APR of 6% your minimum monthly repayment would be £300.

The total amount you owe is £16,000, and your minimum repayments each month are £500.

These particular debts would take over 3 years to pay at the minimum repayment rates.
In this case, you would concentrate on putting any spare money towards the first debt of £1,000 with an Annual Percentage Rate (APR) of 22%. Once that is cleared you can throw more money at the debt with the second highest interest rate and so on. This is called snowballing your debts.
BEWARE – Once your bank realises you have increased your minimum payment on the debt with the highest interest rate, they may well offer to reduce your minimum interest rates. Don´t accept this offer, or you will be paying your debts off for years to come.

Psychologically it is easier to tackle smaller debts first, but always look at the debts with the highest interest and you will reduce them quicker than you imagined possible. By snowballing your debts you will feel a sense of satisfaction much more quickly, and reduce your credit card debts substantially.

If you feel unable to cope with your debts, contact debts.org for free, professional advice about coping with debt. We can arrange debt management plans, (DMPs), Independent Voluntary Arrangements (IVAs) and bankruptcy arrangements, by speaking to your creditors on your behalf. Our friendly team are here to help you, so call us or fill in the online form.

Labels: APR