Everyone overcomes financial difficulties in his own way, but it is not always possible to independently cope with the accumulated obligations. Studying the financial behavior of people, researchers from Harvard made a conclusion about the universality of the application of the “snowball” principle, which helps in a short time to repay the debt.
How financial scientist works
Scientists took information from IC Wallet, a financial company that provides citizens with the service of tracking the financial condition of clients, moving through bank accounts, deposits and loans. The company’s clients set goals and control the implementation process. The company’s service also provided for receiving financial recommendations on an individual basis.
For observations used information collected over a 3-year period, including movements on credit cards. The base for the analysis is represented by observations of 6 thousand people who decided to get rid of credit debt, financial obligations, and also learn how to manage their own finances.
Observations showed that a client tuned to liquidate one debt dealt better with financial problems than those who tried to service all debts at the same time.
Scientist have called the best way to pay off debts
In the course of the research, we conducted 3 tests aimed at testing the hypothesis about the degree of influence of the indicators of the interest rate value, the amount of payment on the repayment results:
- In the course of the first experiment, indicators of the efficiency of credit payment with the maximum and minimum interest were determined. The participants in the experiment were divided into two groups: the first was to distribute credit debt into several payments, the second repaid one debt with the promise of issuing an additional reward for the repaid loan. The clients participating in the tests were offered to simultaneously repay several loans at once or to close the debt simultaneously. For payment, clients earned money by performing certain tasks (collecting words from letter combinations). The results showed that customers aiming at repaying one loan, the results are 15% better.
- The purpose of the second study was to test the assumption that a one-time repayment of the loan is the best goal in terms of efficiency, due to the high motivation of the participants.
- Based on the third experiment, the researchers were going to find out what more influences debt repayment. During testing, it was determined that the most effective way to cope with debt is to realize the results achieved by reducing the total amount of debt. For participants in the experiment, it was more important to understand that actions were not in vain and brought closer to the goal.
The results of the study showed that a person copes with the task, when he clearly sees the approach to the goal. Accordingly, the indicators of the subjects, configured to repay small amounts, were better.
According to the organizers of the observations
It is recommended to build a debt elimination plan in the following order:
- Based on the available financial opportunities, determine the amount that will be used to close the debt immediately, not postponing it for later. If you make the available amount now, then it will remain to give less money.
- Consider how much more you can pay in excess of the amount on schedule without worsening your financial situation.
- Start by paying off small debts, gradually reducing the number of loans and other monetary obligations.