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Is the Debt Snowball Right For Me?

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Credit card bills. Student loans. The mortgage payment. Balancing the budget is challenging for many Americans — especially since the average household carries more than $130,000 in debt, according to a NerdWallet study. With interest charges on the average household credit card debt of $16,000 potentially costing $1,200 every year, it's no wonder that paying off credit card debt is a top priority for many borrowers.

If you're tired of managing multiple payments, worrying about balances, and wondering how to get out of credit card debt, then it may be time to consider the debt snowball. This debt payoff plan, which is one of many balance reduction strategies you can consider, can help with all kinds of loans — not just credit cards. Best of all, the debt snowball may help motivate and empower you to make healthier financial decisions, and play an important role in helping you take control of your future.

What makes the debt snowball unique is its ability to motivate borrowers to keep plugging away until all of their debts are paid. If you have debt and you're determined to pay it off, here's how the debt snowball strategy can help keep you inspired — and potentially lead you to a freer financial destiny.

What is the debt snowball strategy?

Imagine you're in the park after a fresh snowfall, and you want to build a snowman. You form a small snowball and roll it along the ground, packing snow onto it as you go. Keep at it and your small snowball will turn into a large snowman.

The debt snowball strategy works the same way. Paying more than the minimum on one debt at a time instead of trying to pay down many debts at once — which this method encourages — may help decrease the amount of time it takes to pay everything off.

Start by listing each of your debts in order from smallest to largest. Apply every extra dollar you have toward the smallest balance, making only the minimum payments on the other debts. When you finish paying the smallest debt, roll — or "snowball" — the money you were applying to the first debt onto the payment for the next-smallest balance.

For instance, suppose you had balances on three credit cards: $500, $1,000, and $2,000. With this approach, you first throw all your extra cash toward the $500 balance, only making the minimum payments on the $1,000 and $2,000 balances. If you could put $250 a month toward that card, you might pay it off in two months. Then you could take that $250 payment and combine it with the payment you're making on the $1,000 balance. In this way, you chip away at your debt until the balances fall away, one by one.

The key to this approach is aggressively tackling the small debt first so you collect payoff wins as you go. You may also find that the debt snowball inspires your creativity, encouraging you to find ways to come up with extra cash.

When Carrie Willard and her husband paid off more than $80,000, they sped up the process by selling things on the side. "We had two yard sales, created side hustles, worked on a budget, and sold things of value on Craigslist," says Willard, 41, who lives in Atlanta.

Related: My Debt Success Story: Aja McClanahan

Why the debt snowball works

One reason the debt snowball is effective is because you see that your efforts are making a difference as your balances disappear one by one. There's a psychological benefit to making the last payment on a card, crossing that debt off your list, and moving on to the next one.

"It's hard to be in debt, and very stressful," says Beverly Harzog, a credit and consumer expert and author of The Debt Escape Plan. "Just getting rid of one account can be a huge psychological lift."

It worked for Caleb Wetherell, who paid off $60,000 in student loan debt over 32 months. "Every time I finished paying off a small loan, it was a huge victory for me, and it gave me an intense motivation to tackle the next loan," says Wetherell, 26, who lives in Seattle. "It was a goal and a hobby at the same time. Somehow, it made each payment feel exciting."

There's also momentum in watching the amount that you throw at your debt grow over time — and incentive to put "found" money toward your balances. "This may be the month where we have an extra check or maybe the utility bill wasn't as much as we budgeted for," says Denise Myhand, 42, who lives in Huntsville, AL and has paid off $30,000 so far using this method. "I can take this extra money and make my snowball payment even bigger than it would normally be. I feel empowered and confident as I knock off each debt."

Maximizing debt snowball benefits

Because you're not necessarily paying off debts with the highest interest rate first, it is possible that you may pay more in interest charges over time with the debt snowball method. However, you may be able to consolidate debt and help to reduce some of those interest charges by using the debt snowball method with a promotional balance transfer credit card offer.

Keep in mind, however, that not everyone who applies for a balance transfer credit card offer will be approved for one, and credit card issuers typically save the best balance transfer terms for the strongest applicants. If your credit is healthy and you think you may be approved, sign up for alert emails and pay attention to promotional offers so you won't miss an opportunity to apply.

As always, pay credit card bills on time and make sure you abide by a card's terms and conditions. Failure to pay on time and as promised could mean you'll lose your promotional rate, along with any accumulated rewards or miles also offered by the credit card. It could also negatively impact your credit, since about one-third of your credit score relates to payment history. Fees resulting from late payments eat into your interest savings even more, making prompt repayment a must-do for anyone trying to get out of debt.

Related: How to Know When a Balance Transfer Could Be a Smart Move

The debt snowball and your credit rating

A large part of your credit score relates to on-time payments and to outstanding debt balances. And although the debt snowball strategy alone won't build your credit score, as you continue making on-time payments and decreasing your balances, it may help.

Credit reporting agencies compare your total debt balances against your total credit limit. In general, provided you use your credit cards and pay on time and as promised, the lower your ratio, the better your credit score will be. And the less debt you have sitting on credit cards, the better your ratio will be.

For example, imagine you have three credit cards, each with a $5,000 credit limit. On the first card, you have a $4,500 balance. On the second card, you have a $4,000 balance. The third card you don't often use because you save it for emergencies only, and right now it has a $3,000 balance. With $11,500 in total debt, you've used about 77% of your total credit limit, which is $15,000.

How credit agencies use this information to calculate scores is secret, proprietary information. But as you pay this balance down, the percentage of total credit you're using will fall. Assuming you don't take on more debt, and you continue to pay on time and follow other cardholder agreement rules, this may help you build your credit.

Does the debt snowball method work for all kinds of debt?

The debt snowball can work for all kinds of debt — not just credit card debt — and the method only requires a plan and a commitment. Once you start, momentum builds on itself and you pay off more and more debt over time.

Phil Risher, 26, got rid of $30,000 in a year using this approach. "The method worked great for me, and I attribute my success to being disciplined in my budget and staying focused on my goal," says Risher, who lives in Gaithersburg, MD.

Paul Sidwell and his wife paid off more than $120,000 in debt using the debt snowball. "Eventually we ended up paying more than our basic living expenses toward debt," says Sidwell, 40, who lives in Kansas City, MO. "The momentum we saw became rather tremendous."

In short, it's a method that keeps people on task — helping them successfully eliminate debt. "You get that big boost right at the start, and that can help you keep going," Harzog says. "It works for a lot of people."

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