Does the Debt Snowball Method Promise the Most Benefits?
A thorough study by ValuePenguin showed that 38.1% of households carried credit card debt with total balances averaging $5,700. You, like many others, have realized that something has to change. Whether you choose to manage your own payment plan, or enlist the help of a debt management service, you usually proceed with one of two prominent game plans.
The question whirling around the internet asks which of these two is better: the debt snowball or the debt avalanche repayment method. Our article on beating credit card debt gives more details about how these strategies work.
The Debt Snowball
Dave Ramsey and followers make a strong case for why individuals should use the debt snowball method when paying off debt all on their own. The ability to eliminate small balances fast lends people the motivation needed to see their plan through to the end. The rate of success individuals have in paying off their debt only supports the claim that the debt snowball is highly effective.
So, why do hundreds of personal finance experts (and nonprofit credit counseling agencies) advocate using an avalanche as the smarter option?
The Debt Avalanche
First, it’s important to understand that with the debt snowball plan, the periodic boost of motivation that pushes individuals to accomplish their goal is valued above other benefits a repayment plan might supply. The objective is to successfully pay off your debt and maintaining your motivation is essential to getting you there. We’re in total agreement here.
This is why DIYers have a harder time sticking to the debt avalanche method when attempting to repay debt on their own. It takes great discipline to wait longer to scrub that very first high-interest creditor off your list if by chance they come with a bigger balance, even knowing its for your best. Not everyone can do it.
This is why debt management programs (DMPs) are a great option to get the best of both worlds.
No Need to Maintain Motivation All on Your Own
Once enrolled in a DMP, your debt is turned over to a team for management. They provide the guidance and accountability you would need to supply yourself if you wanted to achieve DIY success. They disburse payments on your behalf to as many creditors as is necessary. They also update your new balances, maintain good relationships with your lenders, and keep you on track to repay your debt according to an agreed upon timeline. Credit counseling agencies do the legwork and you get to set it and forget it (for the most part).
Attacking High-Interest Debt Saves Money
When you remove the need to keep yourself motivated, you can instead pay down debts with the highest interest rate (instead of targeting small balances) which can save you money.
As a nonprofit credit counseling agency, this is a goal for our clients. Many methods and services can get you out of debt. However, unlike them, we realized using the debt avalanche method would be the most beneficial because it helps our clients keep more money in the pocket.
This savings can be used to support other aspects of your financial picture including an emergency savings fund, retirement account, and college savings for children. In a debt snowball strategy, this money can be wasted on ongoing high-interest charges.
Eliminating High-Interest Rates Shortens Repayment
When interest is charged on credit, it is added to the principal balance. Once this has occurred one time, from then on you are not only paying interest on the balance but on the added interest you were charged the previous month—how cruel!
It’s important to pay down higher interest rates before your balances are bloated or your monthly payments will go more and more toward paying interest than toward reducing the principal amount you borrowed. In that repayment nightmare, you work really hard, sacrifice a big amount of monthly income to debt repayment and see very little progress in reducing account balances.
By knocking out the accounts with high-interest rates first, you spend less time paying interest than you would if you allowed it to build month after month, year after year as you addressed other debts instead. Money rescued from the interest muncher can accumulate and be put to work crushing accounts down your list. Like a true avalanche, you’ll be able to plow through your balances quicker.
Apart from the benefits of these two repayment strategies, Debt Reduction Services can offer an additional advantage to your management plan. We can negotiate with creditors to cut interest rates down. This helps you get ahead and pay off your debt even faster.
Enrolling in a DMP through a nonprofit credit counseling agency is a guarantee to be out of debt in 3-5 years if your debt is serviceable. The best way to find out if this is a good option is to have your debt evaluated by a certified credit counselor. Consultations are free.
We applaud you for working to pay back the money you owe and begin a life free from debt. Believe your goal is achievable.
Whether you could use some free financial resources to help along your journey, or you’d prefer the assistance of our debt management program, know we are here to help when you need it.
Do You Have Questions About the Debt Snowball Repayment Method?
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If you need more information on choosing between the Debt Snowball and Debt Avalanche repayment methods or have any other questions about your personal finances, please feel free to comment below and we’ll answer right away!