Sunday, October 7, 2012

What Is Cascading Debt Elimination?

What Is Cascading Debt Elimination?

When consumers fall into debt problems, they have a variety of plans and strategies that they can use to pay off debt. One potential method is known as the "cascading" or "snowballing" debt payment process. This method is used when you have multiple debts and need a simple plan to eliminate them.

Cascading Debt Payments

    The cascading debt-relief method can be used by people with multiple debts. A debtor starts by paying the minimum payments on all debts except the smallest. Then the debtor takes all her available excess funds to pay off the smallest debt first. Once the smallest debt is paid off, she proceeds to pay off the next smallest debt using the same methods.

Benefits

    With a cascading debt payment strategy, a debtor can start paying back debts one at a time and receive a psychological reward for each debt paid off. The strategy allows the debtor who would otherwise feel helpless about repaying so much debt to experience measurable results, with clear progress indicators. Further, once the first debt is paid off, the debtor can increase the amount of money paid for subsequent debts and repeat as more debt is paid.

Problems

    While the cascading debt pay-back process can allow you to pay back your bills, there are potential pitfalls. First, by paying the lowest balance first you ignore interest rates. Over the length of your repayment program, you may end up paying more in interest fees as the debts with higher interest rates may have more debts and get payed for later. Second, the strategy does require discipline, and some consumers may not be able to sustain the strategy.

Other Strategies

    While the cascading strategy can work for some consumers, other strategies are available. For merely paying off debts without renegotiating terms or payments, some consumers begin paying back those debts with the highest interest rates. This saves money in the long term, but consumers may not see those results immediately.

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