Are you one of many South Africans currently paying off credit? According to the National Credit Regulator, settling outstanding loans should be a priority for consumers in 2020.
While this may sound daunting, it doesn’t need to be just another impractical resolution. Rather, the well-known ‘Snowball’ strategy can be one way to pay off your loans and start the new decade debt-free.
Having a plan can help you pay off your debts faster, saving you interest and increasing your monthly disposable income. The debt snowballing method is a simple and practical way to do this.
How debt snowballing works
You may have seen pictures of a snowball rolling down a hill. It starts small, but as it rolls it gathers more snow, growing bigger and bigger as it gains momentum. By the time the snowball reaches the foot of the hill, it’s much, much bigger than when it started.
The same basic idea applies to the snowball method, which motivates you through a series of small wins.
You start by paying off the smallest debts with higher interest rates, which gives you more funds to pay off the bigger ones.
From a psychological standpoint, this makes debt seem more manageable and gives you a way to take back control.
Here’s how it works:
- List all your debts from the smallest amount to the largest amount
- Make the minimum repayment on every debt, except the smallest one
- Make your smallest debt your biggest priority – repay as much as you can on it to pay it off as quickly as possible
- Once you’ve paid off the smallest debt, add that amount you’ve freed up to the next smallest debt
- Now repay as much as you can on this debt until it’s paid off
- Keep going, until every debt is paid in full.
Why debt snowballing makes sense
It’s easy to see why this approach makes so much sense. As you pay off smaller debts, which often have higher interest rates, you free up more money to pay towards the bigger debts, which means you will see results sooner. It’s simple, methodical and systematic. It also forces you to focus on getting your budget out of the red and into the black.
In addition to the snowball method, here are more credit management tips for 2020:
- Only take credit for the right reasons. Ask yourself ‘Will the value of the item outlive the credit repayment period?’. For example, buying a computer for your business will allow you to generate an income long after the credit has been repaid.
- Always compare the total cost of credit when taking out a loan. Most people only compare the interest rate, but other costs such as credit insurance and any admin fees should also be part of your consideration.
- Consider consolidating all your debt into a single loan as this can lead to a lower monthly repayment amount. You’ll also only have one payment to keep track of each month.
- Settle the full outstanding balance on your credit card statement to take advantage of the 55-day interest-free period. This means that if you buy a laptop on your credit card and settle the full amount before the 55-day interest-free period ends, you won’t be billed any interest.
- Consider the 50/30/20 budgeting rule where 50% of your income is dedicated to needs such as groceries, utilities, health and insurance; 30% is allocated to wants such as hobbies, dining out and shopping; and the last 20% is filtered into repaying debt and savings.
Francois Viviers is marketing and communications executive at Capitec.