by a.b.
edit: I apparently replaced snowball with snowflake. My bad, I blame the heatstroke. All two gaffs have been fixed.
Dave Ramsey’s debt snowball plan while hailed for it’s ability to get people to pay off their debt, has earned no awards for mathematical sense….until today.
As a math major, I have previously taken issue in comments and forums with Dave Ramsey’s debt repayment plan. Even Mr. Ramsey will admit the math doesn’t jive. According to his debt repayment plan, you line your debts up by balance, smallest to largest, and pay off the smallest one first. Until last week this irked me. While I understand the mental component, I’ve always believed that if giving into your compulsions and needs is what got you into this mess, why do the same thing to get you out? Emotional spending cannot be fixed by emotional debt repayment. Seriously, if you have a $5000 balance at 15%, why are you focusing on paying off a $1000 balance that’s sitting at 3%? That’s when I had the epiphany.
When you snowflake giving priority to the smallest balance, it frees up your credit cards faster, giving you flexibility to potentially pay off your bills faster. How?
Balance Transfers. The faster you have those cards open up, the easier it is to take advantage of balance transfers to reduce the interest rates you’re paying. You can’t maneuver your money well if you’re sitting with balances on all your cards, waiting to pay off that large balance, high interest debt. Open up your credit lines for better flexibility. Make sure you factor the balance transfer fee in, though. Transferring a 12% balance to a 9% card doesn’t make sense if there’s a 3% fee.
Direct Negotiation. You can request a lower fixed interest rate in order to transfer a balance, or to stay with the current card. For example, you can call and say Bank A has offered me a balance transfer at 6%. I’ve been a loyal credit card user for x amount of years. Can you match it? (If no) would you be willing to match 9% (the rate plus balance transfer)?
The number one Modern Tightwad rule is “Don’t Ask, Don’t Get,” so ask! I do understand, however, that with today’s economic climate, the financial industry is clamping down on credit. I would recommend starting negotiation regarding your next balance with the companies right before you make your final payment on your previous balance. Hopefully, this starts a good process and mitigates them closing your account.
So Dave Ramsey had it right, but maybe not for the reasons everyone assumed. If you can pay these small balances off and utilize your open credit lines to keep your interest rates low, you can pay less debt.
Photo Courtesy of Andres Rueda
{ 3 comments… read them below or add one }
I think I must be a little unique in my debt situation. My three forms of debt (one credit card, and two student loans) happened to already be in the perfect order. Credit card has the lowest balance & the highest interest! And the two student loans follow suit!
@Jessie,
Glad it worked out that way! I'm sporting several different accounts, each with different balances and different interest rates. It's enough to make my head spin, but the balances are (generally) coming down each month. Had a couple setbacks but we're heading in the right direction.
Great Post, a.b. It certainly gives me another thought about this method