About the Debt Snowball method: It is the strategy for the reduction of debt. In this, an individual who owes on more than one account pays back the amount as per the balance (means starting with the smallest amount)—on the other hand, paying the minimum amount on the massive mortgages.
Once the payment for the smallest account is made, an individual proceeds with the next massive mortgage. This process continues until the payment of the most considerable amount. The analysts compare this process with the debt stacking process, also known as the debt avalanche method. In debt stacking, one packs back the highest interest rate account first.
The debt-snowball method is usually employed for repaying the revolving credits including credit cards. Under this process, the extra cash is devoted to paying mortgages with the smallest owed amount.
The necessary steps in the Debt Snowball method are as follows:
- The first step for this is to list all the mortgages in the ascending order; smaller balance to the larger one. It is the unique feature of the method where the list depends on the amount owed rather than the interest rate charged. However, if the two debts are nearly close to the owed amount, then the mortgage with a higher rate of interest will move above the other in the list.
- Pay the minimum amount on every mortgage or debt.
- Determine the value of extra credit that applies to the smallest debt.
- Pay the additional charge and the minimum payment towards that particular (smallest debt) until it is paid back. Note that some moneylenders (car companies, mortgage lenders, etc.) will impose extra charges towards the following payment. For the method to work, the moneylenders need to be reached and told that additional costs are to go straight toward the principal reduction. In the current cycle, credit cards are generally applied for the entire payment.
- Once a mortgage is fully paid off, add the former minimum payment (addition to the extra amount available if any) from the first mortgage to the minimum charges on the second smallest mortgage, and apply this new aggregate to the second smallest mortgage.
- Repeat the entire process until all mortgages are paid, and the payment of all mortgages ends.
In theory, this whole process resembles the rolling snowball down the hill, gathering more snow. By the time the end mortgages arrive, the additional amount paid towards the huge mortgages will grow speedily just like a snowball.
The Bottom Line
If an individual is serious about tackling his debt, then he can opt for any method that suits best in his situation and personality. Always remember that the best approach is the one on which one can stick for an extended period. If you are among those who need more motivation to pay off mortgages, then the debt snowball method is perfect for you. You can also use the combination of any two methods.