If you’re looking for ways to go debt-free, chances are that you've heard of Dave Ramsey's “seven baby steps” approach to financial wellness. Baby step #1 is socking $1,000 away in savings, and then it's on to baby step #2 — paying down all your non-mortgage debt using the "debt snowball" method.
Needless to say, baby step #2 can take a while. The good news is that there's actually a way to speed up the process, but it involves bucking good old Dave's advice just a bit. Let us explain.
Is Dave Ramsey ... wrong?
One of the lynchpins of Dave Ramsey’s baby-step system is paying off multiple debts using the "snowball method." With this method, you tackle your debt in order of your smallest balance to your largest.
In a nutshell: While paying just the minimums on the rest of your debt, you put all your extra funds toward paying off your smallest account. Once that’s paid off, you apply that extra money to the next-smallest account, and so on, until all your debts are paid off.
The idea is that as you pay off each account, you have more cash to apply to the next. The amount grows like a snowball you roll along the ground.
Ramsey is a champion of this plan because of the psychological boost you get when you pay off each loan. The idea is that you rack up easy successes early, becoming more and more committed as you tackle more difficult debt. This is a great way to go if your problem with debt repayment is largely about your mentality.
But it does have significant drawbacks.
One is that while you’re paying off your smallest balance, you’re getting killed on interest everywhere else. This might not be a big issue for you in the short term, but if you have larger loans that can take a while to pay off, you might rack up more debt than you need to. That not only costs you money, it slows you down.
So what can you do?
Consolidate your debt
Consolidating your debt means replacing multiple loans with one single loan. Here's why it's a good strategy.
1. It can improve your credit score
Consolidating your debt can actually give your credit score a boost—especially if you’re replacing credit cards with a personal loan.
Credit card debt is one of the worst kinds of debt to have in terms of your credit score. Replacing it with a personal loan—even of the same amount—can help your credit for that reason alone.
In addition, your credit utilization ratio—the amount of debt you have vs. the limits on all your cards—has a profound impact on your credit score. Once again, replacing credit cards with personal loans reduces this ratio—which can help your credit score before you even start reducing your debt.
2. It makes payments easier to keep track of
If you’re considering the snowball method, chances are you have debt with many different creditors. Different due dates, different minimum payment amounts, different interest rates and fees ... all those variables can make it difficult to keep track of everything.
That can be a serious problem because even a single late payment can hurt your credit.
Consolidation eliminates that issue, by replacing all your debts with a single loan. This reduces the chance that you could make a mistake and miss a deadline.
3. You could score a lower interest rate
Credit cards have some of the highest average interest rates in the business. Switching to a personal loan could score you a lower interest rate overall, saving you hundreds or even thousands of dollars while you whack away at your debt.
Think of if this way: The higher your interest rate, the less of your monthly payment is going toward principal. A lower interest rate means you'll make faster progress.
For example, our current top pick for personal loans, Citizens Bank, is currently offering interest rates as low as 7.99% (as of September 2019,) which is significantly lower than you'll find on most credit cards. Even better, there are discounts that could lower your rate by another 0.50%.
4. It removes temptation
Dave Ramsey is all about harnessing your mental game in order to pay off debt fast. Consolidation is great for that.
Why? Mainly because a personal loan is a loan you take out in one lump sum, and pay off until it’s done. You don’t use it to buy your groceries or go on a late-night Amazon spending binge. Unlike a credit card, it removes the temptation to spend.
There’s more than one way to kill off your debt—and Dave Ramsey’s system has helped a large number of people. But if you have multiple large debts with high interest rates, it may be worth your while to consider consolidating before you go all in on the snowball method. You could save yourself a lot of time, money, and hassle that way.
If you're considering a personal loan, check out current offers from Citizens Bank. We like their easy application process, competitive interest rates, and fast approval. Whichever lender you ultimately choose, don't forget to check into discounts! A half or quarter point interest rate reduction can save you bundles over the life of your loan.