Debt Snowball is SnowBULL
I am SO clever with the word play. Reader Cary asked me a question related to my Debt Strategy Sessions. Cary wrote:
“I have some friends who swear by the Dave Ramsey Debt Snowball method of paying the smallest debts off first. But most of what I read says that strategy is too costly. Where do you come out on this?”
My hunch is that Ramsey is appealing to the emotional side of emotional spenders. Paying off the smallest balance, regardless of interest rate on that card, gives someone a “win”. “Hey, I was in debt on three credit cards, I paid off the one that was doing the least damage, and now I only have two left! That’s good, right?!” Yeah, yeah, yeah… you IDIOT!
Without question, it makes the most sense to pay off the highest interest rate credit cards first, because those charge you the most interest, or money.
But people do not always do what makes the most sense. They do what is emotional. In most cases, people got in debt by making emotional purchases of stuff that they could not afford, because those purchases made them feel good.
More Spock, less Snooki
Are we not evolved creatures? Are we going to let emotions guide our actions? You should not pretend that paying off a lower interest card is smarter than paying off a higher interest card. If you have debt, you are an adult – a grup. You need to be honest with yourself and suck it up. Grup it up!
Here are some ideas as to how you can get out of debt:
1. Borrow money from a family member or friend who is LOADED with cash
Total up your debt. Ask for a personal loan for that amount. Offer to pay 4% interest, paying back $X per month. Write up a contract so all parties are on the same page. That’s a great deal for them because it is much more than the 1-2% they could get at a bank. It is also tax free, unless they feel the need to report this to The Man, man. Even so, 4% is still a great deal for all.
Pay off ALL of the card debt. Do not cancel the cards – just stop using them. Canceling the cards lowers your debt to available credit ratio – one of the components of your credit score. Freeze the cards in a block of ice or even cut those up if need be. Just do not cancel the cards.
If the cards charge an annual fee, call the number on the back of the card to ask to convert the account to a free version of the card. This will keep the card’s credit history and duration alive (other credit score factors). That helps your credit score.
Now that the debt is wiped out to the card companies, your debt to available credit drops to zero. Your credit score goes up.
2. No rich friend? Try P2P
Watch my video to learn about Peer to Peer Lending. If that does not work for you, apply for a consolidation loan from your local bank or credit union.
3. And / Or…
Transfer the balances on all of your credit cards to a 0% balance transfer credit card. By far the best card is the Chase Slate card, because there are no transfer fees, no annual fee, and 0% interest for 15 months.
Keep those cards and letters coming!