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Debt Snowball Method Definition and Example phroogal

Debt Snowball Method: Definition and Example

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With the debt snowball method, the idea is that your momentum will increase as you see one credit card or loan paid off after another regardless of interest rates. The feeling of accomplishment after paying off one debt may motivate you to pay off another. This is an effective way to achieve debt freedom.

What is the Debt Snowball Method

The debt snowball method is a way to pay off debts by tackling smaller balances first. After a smaller debt is paid off, the payments are then applied to the next smallest debt balance and so forth. Think of your payment to one card increasing (like a snowball growing larger as more snow is compacted) each time you’ve paid off a balance.

This method might not make the most mathematical sense because potentially higher interest rate cards with higher balances continue to accrue interest. But, this method focuses on a motivation to get rid of one credit card balance sooner rather than later. Read more about the other method of debt repayment–debt avalanche.

How to Use the Debt Snowball Method

  1. List all your debts with the smallest balance first.
  2. Focus on complete repayment of the debt with the smallest balance first while making minimum payments on the other debts.
  3. Use the payments from the first debt (now paid off) to the next debt (row 2) and so on.

Example:

Credit Card 1 – $500 Balance – $25 Minimum Payment

Credit Card 2 – $6,300 Balance – $146 Minimum Payment

Credit Card 3 – $7,000 Balance – $200 Minimum Payment

In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $25 and add to the minimum payment of credit card #2. This would become a payment of $171. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once you’re done paying off credit card #2, you would then use the payments from #1 ($25) #2 ($146), and #3 ($200) to make the monthly payment on credit card #3. After strict adherence, you’ll find you’ve snowballed your way out of debt.

Additionally, you can choose to make higher payments as well.

If consolidating multiple credit card debt is what you need, consider using a debt manager app like Tally or taking a credit card debt consolidation loan with Payoff. You can also shop for a personal loan in the financial marketplace.

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