The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.
Advantages of the debt snowball method
The primary advantage of the snowball method is the psychological boost. When you see debts disappearing, it can increase your motivation to continue paying off debt. And even if you've only paid off a small balance, your confidence in the progress you're making grows.
The debt avalanche method involves making minimum payments on all debt, then using any extra funds to pay off the debt with the highest interest rate. The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts first before moving on to bigger ones.
You should temporarily pause the debt snowball if you use your emergency fund. Just make your minimum payments and rebuild your emergency fund as fast as you can. Once your emergency fund is back to $1,000, restart your debt snowball.
4 Years to Pay off $35,000.
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
Option 1: Pay off the highest-interest debt first
Best for: Minimizing the amount of interest you pay. There's a good reason to pay off your highest interest debt first — it's the debt that's charging you the most interest.
This can include credit cards, student loans, medical bills and whatever other type of debt you have. Include information like the full amount you owe, minimum monthly payment, interest rate and monthly due date, just to stay on track.
The snowball method tackles your lowest balances first, offering small, more immediate wins. The avalanche method prioritizes higher-interest debts, reducing your long-term costs most.
You may have heard carrying a balance is beneficial to your credit score, so wouldn't it be better to pay off your debt slowly? The answer in almost all cases is no. Paying off credit card debt as quickly as possible will save you money in interest but also help keep your credit in good shape.
It's Best to Pay Your Credit Card Balance in Full Each Month
Leaving a balance will not help your credit scores—it will just cost you money in the form of interest. Carrying a high balance on your credit cards has a negative impact on scores because it increases your credit utilization ratio.
A debt avalanche is a type of accelerated debt repayment plan. Essentially, a debtor allocates enough money to make the minimum payment on each source of debt, then devotes any remaining repayment funds to the debt with the highest interest rate.
Always pay more than the minimum payment on credit card bills if possible. Avoid applying for more than one or two credit cards at a time. Consider transferring balances to a lower rate card, making sure the low rate applies to balance transfers.
How much debt is a lot? The Consumer Financial Protection Bureau recommends you keep your debt-to-income ratio below 43%. Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments.
So, for this example you would type =PMT(. 05/12,60,200000). The formula will return $3,774. That's the monthly payment you need to make if you want to pay off your home mortgage of $200,000 at 5% over five years.