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By Stephen Sellner | Citizens Bank Staff
Are you ready to take control of your debt? Then the debt snowball pay down method might be the strategy for you.
How the debt snowball method works is actually quite simple. Start by ranking your debts in order by the amount you owe, from smallest to largest. Next, put all the money you’ve budgeted for debt repayment toward the smallest of those debts and only pay the minimum payment on your other debts. Then, when that first debt is fully paid off, reallocate that money onto the next smallest debt, and so on and so forth.
The whole strategy — popularized by Dave Ramsey — is based on tackling your debts one at a time. By making minimum payments on your other debts, you’re essentially treading water on those for the time being.
Could this be the best debt repayment strategy for you? Potentially. However, as we’ll explain, there are drawbacks to using this method.
Let’s get started.
Great question! To better explain, let’s use a hypothetical example.
Lindsey has the following debts to pay off:
These loan balances and minimum payments are for illustrative purposes only. Check with your lender to find out your minimum payment.
Lindsey’s monthly minimum payments add up to $550. On top of that, she calculates she has an extra $650 in her monthly budget to put toward her debt.
Since her medical bill is the smallest, Lindsey tackles that one first. She combines the $50 minimum payment with her extra $650 to make a $700 payment. Just like that, her medical bill has been fully paid off in one month’s time.
Here comes the snowball.
Next up is her credit card debt. Lindsey takes that $700 that she put toward her medical bill last month and snowballs it onto the $125 minimum payment she made toward her credit card that same month. That means she’ll make a $825 payment this month toward her credit card. Lindsey will continue to pay that $825 every month until her credit card bill is completely paid off.
Then comes the auto loan. Lindsey’s $825 monthly payment will snowball to $1,000 after combining with the $175 auto loan minimum payment. Starting to get the gist?
When that’s paid off, the $1,000 monthly payment will snowball into a $1,200 monthly payment on her education refinance loan. Lindsey will make that $1,200 monthly payment until her refinance loan balance is completely paid off.
The debt snowball pay down method is more a mental strategy than a financially savvy one. Since you’re essentially paying off one debt at a time, you may feel like you’re making more progress than if you tried tackling all your debts at once. It provides a chance to celebrate small wins to keep you motivated, which can work very well for some people.
However, the most financially savvy debt repayment plan is to tackle your highest-interest debt first, then your second highest, and so on. (This is also known as the avalanche method.) By making only minimum payments on some of your debts via the snowball method, you’ll pay more interest on them because it’ll take you longer to pay them off. However, you might find this to be a necessary sacrifice if you feel the debt snowball pay down method will help you get out of debt quicker than other repayment strategies. Talk to a financial professional if you need more information.
Maybe the debt snowball pay down method isn’t for you. That’s OK! What other options do you have to help pay down your debts?
Getting out of debt can be difficult. What if you could consolidate your debt with one easy payment to pay each month? Check out our home equity line of credit and personal loan offerings to see if either debt solution is a good fit for you.
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