Definition
The debt snowball method is a debt reduction strategy where you list all your debts from the smallest balance to the largest, regardless of their interest rates. You make minimum payments on all debts except for the one with the smallest balance, on which you pay as much extra as possible. Once the smallest debt is paid off, you 'roll over' the money you were paying on that debt (minimum payment plus extra) into the payments for the next smallest debt. This creates a 'snowball' effect as the payment amount grows with each debt eliminated. This method is popular for its psychological benefits, as achieving quick wins by paying off smaller debts can provide motivation to continue.
Frequently Asked Questions
How does the debt snowball method work?
1. List all your debts from smallest balance to largest. 2. Make minimum payments on all debts except the one with the smallest balance. 3. Pay as much extra as possible on the smallest-balance debt until it's paid off. 4. Roll the entire amount you were paying on the first debt into payments for the next smallest-balance debt. 5. Repeat until all debts are paid.
Why choose the debt snowball over the debt avalanche?
The debt snowball provides quick psychological wins by eliminating smaller debts faster, which can boost motivation and adherence to the plan. While it might cost more in interest over time compared to the debt avalanche, its motivational aspect makes it effective for many people.
Can the debt snowball method be used for any type of debt?
Yes, it can be applied to most types of consumer debt, including credit cards, personal loans, student loans, and medical bills. It's most effective when you have multiple debts of varying balances.
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