– How to Choose Between the Debt Snowball and Debt Avalanche Methods

“`html

What Is the Debt Snowball Method?

The debt snowball method focuses on paying off your smallest debt first, then applying that payment to the next smallest debt. This approach helps you build momentum by “snowballing” your payments as you eliminate each debt.

How to Pay Off Debt Using the Snowball Method

Follow these steps to use the snowball method:

1. List all your debts from the smallest to the largest balance.
2. Pay as much extra money as possible toward the smallest debt while making minimum payments on the others.
3. Once the smallest debt is paid off, apply that payment to the next smallest debt. Continue this process until all debts are paid off.

Debt Snowball Example

Consider the following debts:

• Credit card: $5,000 at 20% interest, $150 monthly payment
• Personal loan: $1,000 at 10% interest, $200 monthly payment
• Private student loan: $10,000 at 8% interest, $225 monthly payment

If you can afford an extra $100 per month, you would put $300 toward the personal loan while making minimum payments on the others. Once the personal loan is paid off, you would apply the $300 to the credit card payment, making it $450. Finally, you would apply $675 to the private student loan. This method would make you debt-free in 25 months, saving $2,251 in interest.

Pros and Cons of the Debt Snowball Method

Pros

• Quick wins: Gain momentum as you see smaller debts disappear.
• Easy to implement: Easier to order debts by balance than by interest rate.
• Potential savings: May save more interest and pay off debt faster.

Cons

• Less interest savings: Focuses on balances, not interest rates.
• Other factors: May not consider other reasons to pay off certain debts first.
• Could take longer: May take longer to pay off all debts.

What Is the Debt Avalanche Method?

The debt avalanche method prioritizes paying off debts with the highest interest rates first. This approach can save you the most money in interest over time.

How to Pay Off Debt Using the Avalanche Method

Follow these steps to use the avalanche method:

1. List your debts from the highest to the lowest interest rate.
2. Pay as much extra money as possible toward the highest interest rate debt while making minimum payments on the others.
3. Once the highest interest rate debt is paid off, apply that payment to the next highest interest rate debt. Continue this process until all debts are paid off.

Debt Avalanche Example

Using the same debts as the snowball example:

• Credit card: $5,000 at 20% interest, $150 monthly payment
• Personal loan: $1,000 at 10% interest, $200 monthly payment
• Private student loan: $10,000 at 8% interest, $225 monthly payment

You would put $250 toward the credit card while making minimum payments on the others. Once the credit card is paid off, you would apply $450 to the personal loan, and finally, $675 to the private student loan. This method would make you debt-free in 26 months, saving $2,213 in interest.

Pros and Cons of the Debt Avalanche Method

Pros

• Interest savings: Likely to save more money in interest.
• Peace of mind: Knowing you’re saving money over time.
• Can save time: May pay off balances more quickly.

Cons

• Motivation: May take longer to see results.
• Other factors: May not consider other reasons to pay off certain debts first.
• More savings not guaranteed: Depends on your debt situation.

More Tips for Paying Off Debt

Consider these alternatives if you have high-interest credit card balances:

• Debt consolidation loan: A personal loan to pay off other debts, usually with a lower interest rate.
• Balance transfer credit card: Offers 0% APR for a period, allowing you to pay down debt interest-free.
• Debt management plan: Consult a credit counselor for personalized advice and a potential debt management plan.

The Bottom Line

Choosing the right debt payoff method depends on your priorities: saving money or eliminating individual debts. Consider consolidating debts to pay them off at a lower interest rate. Regularly check your credit score to track your progress.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

“`