What is the Debt Snowball Strategy?
The snowball strategy helps pay off debts by focusing on the smallest balances first and building momentum toward larger balances.
How does the Snowball Method work for paying off debt?
The snowball method starts by paying off the smallest debt first and moving on to the next smallest debt. Then, continue doing this with the rest of your loans in the same manner. During this process, keep making the minimum required payments on all your loans and put any extra money each month toward the smallest loan balance.
How does the Snowball Strategy work in practice?
Suppose you have several outstanding loans. Your budget shows that you have an extra $100 each month to pay off additional loans. You can use this $100 to pay down debts using the snowball strategy. Start by ranking each loan or debt from the smallest loan balance to the largest.
Comparison between the Snowball Strategy and the Avalanche Strategy?
The snowball strategy differs from another well-known strategy called the avalanche method. The avalanche method prioritizes debts with higher interest rates (instead of the smallest loan balance). The avalanche method reduces overall interest costs and helps you become debt-free faster, but it may not provide the quick wins that keep you motivated. The snowball method is a great strategy for eliminating debt while keeping your spirits high.
Should you use the Snowball Method?
The snowball method is an excellent strategy for getting rid of debt. If you enjoy the positive motivation from small victories and you don’t have many high-interest debts, it may be a good choice for you. However, the snowball method isn’t suitable for everyone; in some cases, it may not be wise to accelerate payments on certain debts. For example, if you’re pursuing a federal student loan “forgiveness program,” the Department of Education may allow you to stop payments after 120 qualifying payments. If the government can grant you forgiveness later, there’s not much benefit in making extra payments.
What to do if you need help?
If you need additional help managing your debts, there are several options available. You can speak with non-profit credit counseling agencies that provide advice and debt assistance. The agency can help you create a Debt Management Plan (DMP) that allows you to lower your monthly payments and interest rates, making loan management easier. Debt settlement can also be considered as an extreme alternative, where settlement companies help manage your debts by negotiating or consolidating balances. They may set up a payment plan or even assist you with filing for bankruptcy relief for a fee. However, creditors must agree to the settlement, and they may not be willing to accept your offer. Debt settlement can also affect your credit history, so you should explore all available alternatives before resorting to this solution.
Frequently Asked Questions:
How does the Snowball Strategy work?
The snowball method pays off the smallest debts first and then transfers the money you were paying on the settled debt to the next debt balance.
Is it better to use the Snowball Method or the Avalanche Method?
The right strategy for you depends on your personal comfort. If you don’t specifically need motivation to pay off debt, the avalanche method may be best for you. However, if you need early wins to stay motivated, the snowball method may be the right choice.
Source: https://www.thebalancemoney.com/what-is-debt-snowball-1293674
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