Author: Lyle Solomon
It can be challenging to get out of credit card debt, especially in the case of high-interest credit cards. When you’re dealing with debt, it’s essential to plan ahead. There are various options available to you. The Snowball and Avalanche methods are two of the most popular examples. The Debt Lasso approach is a little more complex, but it can help you save money on interest and get out of debt faster.
What Are The Snowball and Avalanche Methods?
Before we move to talk about the Lasso method, let’s discuss a little bit about the debt snowball and debt avalanche methods to help us differentiate between each.
The Debt Snowball method involves focusing on the smallest amount of debt first. You make your minimum monthly payments and put any excess income towards the smallest debt. You can then move on to the next smallest debt when a card is paid off. The debt snowball method’s significant advantage is that it helps build motivation.
The Debt Avalanche method will have you add any excess from your budget towards the highest interest debts. This method helps to minimize the amount of interest you pay over time.
The Debt Lasso Method
The Debt Lasso method was popularized by the Debt Free Guys. It involves “lassoing” your total credit card interest down to zero or as close to it as possible. You do this by transferring your debt from a high-interest credit card to a lower interest one, preferably a zero-interest card. The balance transfer may incur a fee of 1-5 percent.
If you can’t get access to a zero-interest card, you can transfer the balance from an existing high APR card to a lower one. If one of your cards has an 18% APR and another has a 10% APR, it makes sense to transfer the balance of the 18% card to the 10% card.
Or, you can also contact credit card companies and ask them to lower their interest rates because of your financial situation. It is more difficult to persuade a credit card company to agree to a 0% interest rate on an existing card. That’s why finding and taking advantage of 0% interest rate credit cards is also an important strategy in the Debt Lasso method.
Alternatively, you can also consolidate your credit card debts by taking out a low-interest loan. But the availability of a low-interest loan depends on your credit score.
Benefits of the Debt Lasso Method:
- This method can save you the most amount of money while you pay off your debt.
- Using the Debt Lasso method can be the quickest way for you to be debt-free.
- It shares the advantages of both the Snowball and Avalanche method. You get the satisfaction of paying off one debt at a time and also pay the least amount of interest.
- If done correctly, you can increase your credit score using this method.
- You can automate payment plans with this method. So after doing all the initial calculations, you won’t have to recalculate your payments every month, unlike the other two methods.
How to Use the Lasso Method Successfully
Negotiate with your credit card company to offer you a lower interest rate on existing credit cards. Also, keep an eye out for balance transfer offers. Directly calling your credit card company to ask about a lower rate might get you a better offer. Although there is no guarantee, it is still worth trying to get an offer that will give you more flexibility while paying off your debt.
Sort all your credit cards in descending order from the highest interest rate to the lowest. Transfer the balance of the card on the top of the list to a 0% interest card. Once a balance is paid off, or you apply for and receive a new transfer offer, repeat the process with your credit cards with outstanding balances.
You can also opt for a low-interest loan to do the same and pay off as much high-interest debt as you can.
You absolutely must not reduce your monthly payments based on your new, lower required minimum monthly payments. This allows you to direct all of your payments toward paying off your principal balance rather than the interest amount.
Is the Lasso Method For You?
The Debt lasso method may not be for everyone. For example, if you owe double or more than your gross annual income, this method won’t help you a lot.
Say your gross income is $45,000, then this method will be helpful with a credit card debt of around $22,000 or less. But if you owe $65,000, for example, you should find another way to pay off credit card debt.
The Debt Lasso is best for people who have an average or above-average credit score because they can get lower interest rates on debt consolidation loans or zero balance transfer credit cards. But even with poor credit scores, you can get lower interest rates if you spend some time looking for it.
The Bottom line
The Debt Lasso method can be the quickest way for you to be debt-free. It can also save you the most amount of money on interest. But you have to be consistent with your payments for it to work. Missing a payment on a 0% APR card can result in even higher interest rates than your previous credit cards. There is often a clause in the fine print that allows credit card companies to increase the interest rate after a missed payment. Make sure to read the fine print to be aware of such facts and policies.
Simultaneously opening a 0% (or low APR) credit card and closing high-interest rate ones can affect your credit score. You can avoid this by keeping the oldest cards open with a zero balance to preserve your credit history length.
About The Author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.