Our opinions are our own. Here is a list of our partners and here's how we make money. The debt snowball payoff method can keep you motivated as you work to crush your debt. With this strategy, you pay off your smallest obligations first, then roll the amount you used to pay those first debts into paying off your bigger ones, gaining momentum with each debt paid off — like rolling a snowball down a hill. The debt snowball calculator below does the heavy lifting of determining a debt payoff path for you.
Paying off your credit card debts according to the interest rate is a smart move, mathematically speaking, but can take longer to reach your first repayment milestone. If you need to be motivated to stay on the path to debt freedom, paying down the smallest balances may be your best bet. Being able to knock out a few smaller bills right away can build your confidence and give you the push you need to stick with your debt repayment plan.
Once you get all the little debts out of the way, you can decide whether you want to keep paying your debts based on the balance or switch to paying the highest interest one first.
The important thing is to get on a debt payoff plan that works for you and that will help you get out of debt fast. Debt can take many different forms. Understanding the difference between good debt and bad debt can influence your repayment strategy. The debt snowball is a type of accelerated debt repayment plan.
You list all of your debts from smallest to largest. You then devote extra money each month to paying off the smallest debt first; you make only minimum monthly payments on the others. When the first balance is settled, you move on to the next smallest. The debt snowball can be an effective method for settling just about any type of debt, with the exception of mortgage loans.
A lot of its appeal is psychological. It has the debtor target small balances to pay off first; erasing these "easier" outstanding balances gives a motivational boost, encouraging the debtor to stay disciplined and keep on with their debt repayments—the way the quick loss of a few pounds encourages a dieter to stay with a weight-loss program.
Whether a debt snowball or a debt avalanche is better depends on whether we're speaking in financial or psychological terms. In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest rates—targeting the most expensive ones first—it means you end up paying less in interest. That adds up to paying less money overall—provided you stick with the payment plan.
But, as any behavioral finance expert will tell you, human beings are often irrational when it comes to money. They find it much easier to stay motivated when they pay off smaller debts first, regardless of their interest rates. So, even though it might cost more, the debt snowball is better, psychologically speaking—debtors are more likely to stick with the program because they have a stronger sense of making progress.
Whether you should pay off big debt or small debt first depends on your psychological makeup. Studies have shown that paying off small debts often leaves people feeling more satisfied—small victories, so to speak—and more likely to keep on with a repayment program that eventually clears all their outstanding balances. Certainly, you get quicker results paying off the small debt, and it simplifies life, to have fewer bills coming in each month. On the other hand, paying off big debt is more cost-efficient in the long run.
The larger your outstanding balance, the more interest it's generating; in fact, a big percentage of your monthly minimum payment is probably going just towards the interest. So, by settling the big debt, you will save on interest, and you will free up funds for other bills and other purposes. Paying off debt has its advantages—especially if you're incurring a high-interest rate on it.
With a lot of consumer debt like credit cards , as much as half of the monthly minimum payments go towards interest. Those interest payments are just money thrown away. A lot of debt will also ding your credit score, making it hard to get financing at good rates if you want to buy a home or other big-ticket item.
And finally, paying off debt will free up funds for other things—like savings or investments. But there are pluses to saving too. You're putting your money to work for you, generating returns and earning interest. And, thanks to the miracle of compounding , your principal can multiply quite a lot over the years. Since time is a factor, the earlier you start, the better. Of course, much depends on what prevailing interest rates are, and how aggressively you want to invest your funds.
As a general rule, if you can earn more interest on your money by investing it than your debts are costing you, it makes sense to invest. If you are serious about tackling your debt, then pick which method is best for your own situation and personality. The best method is the one you can stick to.
If you are a person that needs more incentive to pay off debt, then stick with the debt snowball method. If devoting money to interest payments—instead of denting principal—drives you nuts, then you might prefer the debt avalanche approach.
You can also use a combination of the two methods. Choose a debt that's relatively small a la the snowball method but that carries a high-interest rate for the avalanche approach to tackle first. If both methods appear insufficient, you may want to consider debt relief instead.
Both debt repayment plans are useful and can help you regain financial freedom. Debt settlement involves negotiating with creditors to settle an existing debt for less than the amount owed.
Debt settlement typically leads to a significant negative impact on credit scores and reports. Bankruptcy is the legal status of a person or entity that cannot repay debts to creditors. While six types of bankruptcies exist, generally, only two of them pertain to individual debtors.
The first and most common type is Chapter 7 bankruptcy. The primary purpose of a Chapter 7 bankruptcy is to discharge debt, relieving the filer of the legal obligation to pay it back. However, this will likely entail the sale of some personal assets to pay off creditors. Also, this process cannot discharge obligations such as tax debt, student loan debt, child support, or alimony. The second is Chapter 13, which constitutes a reorganization. This puts the filer on a payment plan that can last anywhere from three to five years.
Once the borrower completes the payment plan, any remaining debt gets discharged. Unlike Chapter 7, Chapter 13 bankruptcy often allows for the retention of valuable assets rather than having the Court sell them.
One's assets and income usually determine whether a borrower files for a Chapter 7 or Chapter 13 bankruptcy. However, filing for bankruptcy will negatively impact one's credit report for up to a decade. This makes it difficult to apply for loans, mortgages, or new credit cards. Landlords and future employers generally view bankruptcy as unfavorable, and it can affect future rental or job applications. Payment Interest Rate 1.
Show More Input Fields. Yes No If "Yes" is chosen, after a debt has been paid off, the money that was being paid to that specific debt will be distributed towards paying off remaining debts; the total amount initially allotted to monthly payments will be fixed until all debts are paid off. If "No" is chosen, after a debt is paid off, the monthly payment for that particular debt will not be distributed towards paying off the remaining debts.
In this case, the total amount allotted to monthly payments decreases as debts are paid off.
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