Debt Snowball - 2 Schools of Thought

The debt snowball is a debt reduction method and strategy used to pay off debt. It is widely preached by debt counselors all over the world and many consumer finance and debt help gurus such as Dave Ramsey absolutely swear by it.


How the Debt Snowball Works

It is really a rather simple concept. The one employing this method simply lists all their debt and budgets out the minimum payment owed monthly to each creditor. Then one creditor is selected and any remaining funds available after all minimum payments have been made is allotted the remaining balance. After that creditor is paid off that minimum payment as well as the remaining excess funds is targeted towards the next selected creditor. Thus the snowball grows. You pay of the next creditor at a faster rate then the previous. As creditors are eliminated the snowball grows bigger and bigger. Rinse and repeat.

There is an internal conflict in this method. Conflict arises in determining which creditor should be targeted first, second, and so on.

There are two schools of thought on this matter. The "motivational finance method" and the "logical finance method".

1. Motivational Finance Method - Here the creditor owed the least amount of money is always targeted first. In this way the one paying off debt is thought to be more motivated because they are awarded the satisfaction of seeing the fruits of their labour sooner. However this method pays no attention to interest rates. Thus in theory the consumer will most likely pay more then the one who utilizes the logical method.
2. Logical Finance Method - Here the highest interest bearing creditor is paid off first. In this way the consumer is paying off their debt the fastest and the cheapest. However experts tend to agree that the consumer will be more likely to quit than the same consumer who employs the motivational finance method.

So Which Debt Snowball Method is Best?

Technically it is kinda impossible to argue against the logical method. However, if the consumer in financial hardship is not motivated then perhaps the motivational method would work better. I would contend that if the consumer can't stay self motivated enough to see it through the logic method then neither would work anyway. But that is just my opinion. Personally I would rather get out of debt faster and cheaper.

Simple Thoughts On Mortgage Lending

When you take out a home loan you are literally buying a dollar for three dollars. By the time you are done paying the mortgage you will have paid the lender three times the money they lent you. This is how most businesses work.


Businesses purchase inputs, transform them into an output that is worth more. Business operations create value through this transformation process.

Lenders find people who need more money than they could possibly come up with themselves by the time they need it. This person is the borrower. They also find people who have more money than need during this same short term window. The lender than connects these two. They act as a broker.

Lending money is easy. Managing the risk of losing money in a way that consistently yields more return than loss is the trick.

Thus the real trick that lenders typically and historically do so well is to find opportunities to loan money to those who will do their best to pay back that money plus interest over a period time. One payment at a time. They do this by finding folks with steady consistent income that have a history of paying their bills and following through with their past financial obligations.

Middle class consumers who are the typical mortgage borrowers are by themselves to risky to be trusted with such a sizable loan over such a long period of time. A lot can happen in thirty years.

The asset being purchased with the loan is what creates the security for the lender and allows the American dream to be more than a dream. The fact that the lender is able to obtain the right to force a sale of the property secured by the mortgage loan is what allows the American dream to become an American reality.


Related Articles

How Homeowners Stop Foreclosure

Home Buyer Considerations

Business Basics - Understanding the Certainty of Uncertainty

Credit Websites for US Consumers

There are three official websites that a US consumer can visit and access their free annual credit report. These three sites belong to (one each) the three major credit bureaus. I have listed the 3 credit bureaus below.


Three Credit Bureaus 

1. Equifax
2. Experian
3. Transunion

The three applicable websites that allow consumers to obtain their free annual credit report (and more) are listed below.

• www.Equifax.com
• www.Experian.com
• www.Transunion.com

Consumer Credit Reminder

I just wanted to let folks know, or at least remind them, that they will be able to get their credit reports just fine, however, they will not be able to obtain their actual credit score.

the credit score is something you generally have to pay for unless you make use of some sort of promotion or service in which you are generally going to have to give someone some sort of business somewhere.

Related Articles

DIY Credit Card Debt Settlement Plan

Three Principles of Debt Settlement

Lenders Will Reduce Debt

How Credit Card Companies Make Money

Keeping Up with Your Credit Reports? - You are Not the Only One

Many consumers like to keep an eye on their credit. Monitoring your credit report and credit score is a healthy habit of the financially savvy. It is a sign of smart personal finance and debt management habits. This is no secret.

What many folks don't know is that they are not the only ones looking at their credit reports, credit history, and their credit scores.


In this post I will provide a list that discloses some of the typical third parties that commonly access and consider consumer credit scores.

Third Parties That May Review and Monitor Your Credit

• Employers
• Potential Employers
• Underwriters
• Insurers
• Anyone who receives a credit application from you.
• Businesses considering or currently taking part in any sizable transactions with you.
• People Involved with legal matters in court may need to access your credit history.
• Residual billing services such as cell, cable, power.
• Land Lords and Rental Agencies

Related Articles

DIY Debt Settlement Plan

Debt Consolidation

Three Principles of Debt Settlement

Bucket Budget Saving

Cash, Credit, or Cell?

"Hey can you cover me I left my charger at work?"

This is how you will sucker your friend in to paying for your night out in a year or two.

Confused?

Yeah... you, Master Card, Visa, and American Express too.


In just a few short months consumers will have the option to pay with cash, credit card, or their smart phone.

That's right soon your smart phone will be just like a credit card except better; it won't be a credit card.

Who Is Behind This New Payment Method?

More then several players are going to be directly offering a cell phone payment method.

Below is a quick list of the bigger companies creating an alternative credit method for your smart phone.

Isis

AT&T, Verizon, and T-Mobile are all joining forces to form a company or entity or whatever they are call such a partnership. This new transaction processing company will be called Isis.

Google and the Android Operating System

Google is developing a system that will integrate with their Android operating system. All a phone will need is the embedded chip.

New Start-Ups 

There are several new companies that have already formed that are going to offer solutions for both consumers and merchants as an alternative to paying with the old credit card.

Why the Push to Create a New Payment Method and Credit Card Alternative?

Mobile Networks

This is the obvious answer. All the big data networks such as AT&T, Verizon, and T-Mobile will expand their offered services in a big way. The electronic transaction solution business is one hell of an extra business to get in to. They will get a cut of every transaction just like the credit card companies do now.

Consumer Choice

Then of course there is the consumer demand for an alternative to credit cads. there is an obvious benefit to being able to pay with your smart phone in addition to the other two choices that we already have. though this is an obvious motive for coming up with another merchant transaction solution and alternative to credit cards it is not even close to the main driver of this new industry.

Merchant Incentive - A Cheaper Better and Smarter Alternative

Merchants are going to welcome this thing with open arms. Merchants have a real love hate relationship with credit cards. The problem that merchants have with the existing credit card transaction solutions is the price they are charged by the credit card companies. It really puts a dent into the margins.

Also the credit card companies have been increasing rates on the merchants to make up losses that the banks have incurred during the credit crunch and massive waves of loan defaults.

To top it off the credit card companies have made it a breach of contract for merchants to say anything about the expense to consumers.

In fact many people have no idea how credit card companies make money. It's not the interest we all pay.

Merchants will be able to cut the transaction expense in half. This means bigger gains in margin. This thing will be huge for merchants.

Credit Card Companies are in Trouble

The one thing that is crystal clear amidst all this new possibility and choice that consumers, networks, and merchants will have in the very near future is that credit card companies are not going to fair well.

Sure there is going be a place for credit cards. Trust me when I tell you that credit cards are not going anywhere. I am actually surprised that the bigger credit cad companies are not more involved with this new movement but the again I guess these phone networks have a pretty solid infrastructure already in place.

My next post is going to be on what this will mean for consumers and merchants as well as the data networks. The positive impact and benefits of ths shift is going to be a lot bigger then most people would think and I really want to paint a vivid picture for everyone.

So check back soon!


Related Articles

Verizon vs AT&T - Comparing iPad Data Plan Financial Value

DIY - Credit Card Debt Management Plan

Consumer Credit Declines

Looking Back at Cash For Clunkers - Obama Plan

August 2009

Cash for Clunker - Obama Stimulus Program

The phrase "Cash For Clunkers" has been all over the media as of late and for good reason. Cash For Clunkers is thus far the most successful economic stimulus program, this notion is impressive by any measure but is even more impressive when you take in the fact that it makes up less then 1% of the stimulus budget. Not to mention that this figure was increased three fold from the original 1 billion dollar budget to 3 billion which was passed by congress due to the overwhelming success.


What is the Cash For Clunkers Program?

The Cash For Clunkers Program is a Consumer spending and automotive industry stimulus program that awards consumers with a substantial rebate in the amount of 3,500-4,500 dollars for meeting the following:

The consumer must trade in a "clunker" which is a term to describe a older automobile that gets poor gas mileage. Clunkers get 18 or less miles to the gallon.

The consumer must then purchase a new car that is fuel efficient and at least 4 miles to the gallon more efficient then the clunker traded in. The Incentive or amount of the rebate awarded is much higher for a car that is 10 miles to the gallon more efficient then the clunker traded in.

• 3500 dollars is awarded for a four mile improvement.
• 4500 dollars is awarded for a 10 mile improvement.                  

As mentioned in the beginning of this article the Cash For Clunkers Program performed much better then expected which was the catalyst behind congress's decision to triple the budget. Taking a look at the financial numbers describing the economic activity makes the popularity of the Obama stimulus program quite evident.

Resulting Economic Activity of the Cash For Clunkers Program

• Approximately 700,000 - 750,000 Transactions or new car purchases
• Approximately 20 billion dollars in sales

Benefits of the Cash For Clunkers Program

Economic Activity surged and more importantly then how much is where. Consumer spending as well as the automobile sales were two of the most troubled aspects of the recession and these were the beneficiaries of Obama's Cash For Clunkers Program.

Consumer Value

The Cash For Clunkers Program allowed the consumer participants to obtain substantial value per dollar.

Environmental Implications

This program will obviously help the environment because of the programs focus on fuel efficiency.

Gas Prices

The cost of fuel or gas will inherit downward pressure because of the quarter million clunkers that have been taken off the road and replaced with a more fuel efficient counter part.

Jobs and employment

This program will obviously help improve the employment numbers given the increased consumer spending.

Credit and Lending Activity

These new automobile purchases gave an upward push to lending activity, as consumers took on secured debt to finance these purchases.

How Credit Card Companies Make Money - What you may not know

If you are a consumer then chances are you have a credit card account, or at least have had a credit card account in the past.

Do you know how credit card companies make money? 


Do you know why credit card companies are so willing to lend via unsecured revolving accounts?


Most people would guess credit card companies such as Visa, Master Card, Discover, and American Express make their huge profits by charging consumer borrowers interest on the money they borrow via their credit card.

Most people are wrong.


Though some credit card companies lend some of their own money or at least make money off the interest that is charged this typically represents a insignificant portion of their overall revenue. This information may come as quite a surprise. But it is more true then most can imagine.

Common Credit Card Company Revenue Streams and Origins


Transaction Commissions

Transaction commissions are the bread and butter of the credit card industry.

When you pull out that Visa card and make a purchase the merchant pays a portion of the money charged to Visa or whatever credit card or bank applicable. The exact percentage of the charge that is handed over to the credit card company variable. This rate is different from card company to card company and from merchant to merchant.

Small merchants pay more. Big merchants pay less. Exclusive and smaller credit card brands charge more. Larger and bigger credit card companies charge less.

For instance McDonald's pays a small fraction of what a "Mom and Pop" store would have to pay. Having said that the typical merchant is going to end up paying 1%-7% depending on the card.

American Express and Discover typically charge higher rates then the larger companies such as Visa and Master Card.


Borrower Fee's

Many credit card companies charge annual maintenance fee's, late fee's, and whatever other fee that some guy wearing a tie and a rolex dreams up. These fee's are typically 10 - 100 bucks a year per card. That may not sound like so much but take 50 bucks and multiply it by say 50 million accounts. Now we are talking real money.

Advertising and Marketing Revenues

Information. The commodity of all commodities. Credit card companies have found themselves knee deep in consumer information. What population of Visa card holders have made at least one monthly online purchase for the last nine  months? Well you can most likely obtain some pretty accurate answers to that question if you are willing to pay for it. Even if a buyer of such information is unable to buy that info they will still be able to reap the benefits of knowing the answer.

What do I mean by that?

Perhaps the buyer is able to place an email blast to all those card holders, or a direct mailing campaign, or whatever. For a fee per mail-out or phone number or maybe a part of the revenue generated from the marketing list. the possibilities are limitless.

Cross Selling Related Products

Protect your credit score. Buy life insurance. The offers a consumer gets are limitless. many of these offers are through one of your existing credit card companies. these large cross selling efforts have a similar macro effect as does the annual maintenance fee. If a card issuer is able to generate an average of 18 dollars per credit account via other products and services then these companies are able to generate billions an additional revenue.

These same tactics work great for other outside company products and an affiliate program.

So there you have it. Now you know that your credit card company is not focusing on that interest rate they are focusing on transaction volume, marketing dollars, and consumer information.

Sleep well.

Consumer Credit Declines

Consumer credit is declining. The American consumer is able to buy less and less on credit with every passing month.

During the month of July consumer credit dropped by about 3 billion dollars. As of August the collective American consumer was able to buy 2.4 trillion dollars worth of merchandise via credit if we were to all max out every account we had.


2.4 trillion is the lowest levels of consumer credit sense 2007.

More specifically revolving credit accounts which are dominated by credit card accounts fell by 5 billion dollars down to a total of 822 billion dollars in credit.

You may notice that those numbers do not exactly make sense. The 5 billion lost on credit card accounts was off set by a rise in auto loans and non revolving credit. Non-revolving credit rose by almost 2 billion dollars. to about 1.6 trillion.

oddly enough mortgage rates are at all time lows with the average 30 year fixed rate home loan at a microscopic 4.27%.

I think the declining consumer credit is a good thing, or at least a necessary thing. The US consumer has been overspending for years. We now are able to see what effect easy money ultimately has on the economy. I think we have all learned the finance lesson for the decade.