Snowballing Your Debt: How Does It Work?
As mentioned in a previous post, there are different types of debt repayment strategies. In this article, we will be looking at the snowball repayment method, how it works, and whether or not this is the right choice for you.
What is Snowballing your debt?
Firstly, this strategy works well if you have multiple debts over different sources of credit. This could be credit cards, loans and mortgage payments. The premise of Debt Snowball is to pay off your smallest payments first and then after this is paid off, ‘Roll’ the amount into the next smallest payment, and so on. The payment amount you pay is supposed to ‘snowball’ bigger and bigger before eventually, you will have rolled down the hill so quickly you’re debt-free.
This is very popular with people who are in debt as psychologically it goes a long way to helping with the stress of debt. This is because the system is front-loaded with rewards and gives you the satisfaction of quick progress.
Note: Remember this strategy also leads you to paying more interest as your higher interest payments are getting bigger and bigger, since you’re only paying off the minimums each month.
How To Put This In Action?
First and foremost, make sure you have arranged your debts in order from smallest debt to the bigger debt. Even if you’re paying a higher interest rate on a different debt, for snowballing this is irrelevant. You pay the smallest overall balance first.
Your sole focus should now be aimed at putting any extra money towards getting rid of the first debt you’re paying off. Remember, you still need to budget to make the minimum repayments on your other debts.
Workable example: You have a credit card debt of £5,000 with a 22% interest rate, a car loan of £2,000 with a 5% interest rate and a mortgage of £15,000 at 1.8% interest rate. With snowballing, you would pay the car loan off first, then the credit card, and lastly the mortgage. You would put all the money you have spare towards the smallest, aka – the car loan, before moving on to the credit card once this has been paid off.
With the workable example above, you can see why this could psychologically be a more appealing strategy for most people, as you can see progress very quickly. However, hopefully you can also recognise that the high interest rate debts can get rather big as you’re not tackling them until you’ve paid the smaller debt.
Pro Tip: If you do choose the snowball strategy as your debt repayment option. You can always try and find a lower rate interest rate for your other debts in the form of debt consolidation. This could be either through applying for a new loan which has a much lower interest rate, or from a balance transfer card where hopefully you can access a long 0% interest period.
Will This Help Me?
Obviously, YOU know yourself better than anyone else. If you know that you get bored, stressed, or give up easily when things are tough then debt snowballing can be a really useful and easy method to follow. Yes – it will cost you more long term. BUT, if this means you actually will be debt free long term then that’s not necessarily a bad thing.
The key to tackling debt is really being focused and staying on the right path. Of course, this is a lot easier said and done, but this is why there are different options for people out there. The main two are debt snowballing and debt avalanching, and this is because these have been proven to be the most successful approaches.
As long as you get out of bad debt as quickly as possible and you find a strategy that works for you, that is all that matters.
Let us know in the comments whether you think debt snowballing is a good strategy, and if it has worked for you!