How does debt snowball work? — Bright Money
By: Bright Money
Tags: Debt, Bright Money, Financial Planning, Personal Finance, Fintech

Debt snowball

Debt snowball

The debt snowball is a debt-reduction method that always prioritizes paying off the debt with the smallest balance. When a card is paid off, apply its minimum payment to your payment on the next-smallest balance.

Paying off multiple credit cards can get complex, juggling due dates, minimum dues and cards with high interest rates. Using a solid, proven strategy can pay off cards and simplify your monthly payments.

The two most popular strategies are the “snowball” and the “avalanche,” and both can be effective at keeping you on track.

The debt snowball method is the simpler method, so let’s look at how it works.

How does debt snowball work?

The snowball method is simple and straightforward: each month, you’ll pay off the card (or the loan) with the lowest balance — regardless of interest rate.

When a card is paid off, you’ll apply its minimum payment to your payment on the next-smallest balance.

It’s called the “snowball” because you gain momentum as you pay off each card, both in the payments you’ll roll over and in the confidence you’ll gain seeing your debts cleared, one after another.

How long should debt snowball take?

Good question! But the answer is tricky.

The amount of time it takes for the debt snowball method to pay off your debts… depends on the size of your debts. The method is designed to be easy, to keep you on track and to pay off cards one by one.

Here’s how it works step by step:

Step 1: Make a list of your debts, arranging from lowest balance to the largest. Don’t bother with the interest rate. Look only at your balances.

Step 2: Make the minimum payment due on all your debts — except for the debt with the lowest balance.

Step 3: Pay as much as you can afford on the debt with the lowest balance.

Step 4: Month by month, repeat until the lowest balance is paid.

Step 5: Once the debt with the lowest balance is paid off, apply the same method to the next-lowest balance — adding the minimum payment of the card you’ve just paid off.

For a lot of people, it’s thrilling — watching debt after debt get paid off and cleared.

How long this method takes depends on your lowest balance and what you can afford to pay against month by month.

How do I calculate my debt snowball payments?

Let’s look at an example to see how the debt-snowball method works. In this scenario, Jill has the following debts:

* $23,000 student loan at 5.28% interest rate

* $9,400 total credit card debt at 16.99% annual percentage rate (APR)

* $7,500 car loan at 5.27% interest rate

In this example, using the snowball method, Jill would begin by paying the minimum due on all three debts — and pay more on the car loan, because it has the lowest balance.

Jill also budgeted a generous amount for debt snowball payments — $3,000 every month. So she’d pay off the car loan and her credit card debt in about a year, leaving her with more funds to pay off her student loan within the following year.

But because the snowball method doesn’t prioritize debts with higher interest, she’ll end up paying more in interest charges than if she used the debt-avalanche method, the other popular debt-reduction strategy.

How can Bright help with credit cards?

Bright can pay off your cards faster — and save you money on interest charges. Bright uses its own patented system of A.I. and data science to analyze your finances and, following your monthly goals, makes payments for you, always optimized to lower your interest charges. Bright works automatically too, so you don’t have to worry about sticking to a debt-reduction strategy.

If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your checking account and your cards, set a monthly goal, and Bright gets to work. Bright also makes every payment on time, so you also never pay another late fee.

Recommended Readings:

Understanding Millennials and Money

The Benefits of Living Debt Free

Originally published at https://www.brightmoney.co.