If you are ready to get out of debt, you might want to consider using a debt-relief strategy to do so. The Debt Snowball Method increases motivation by winning quick and helps to reduce the overall debt burden. Here’s what you need to know about using a debt snowball if your loan portfolio includes loans with an interest rate of 0%.
What is the Snowball Debt Method?
IN snowball debt strategydebt repayment focuses on paying off the debt by starting with the smallest balance and working towards the largest. You can think of it as a snowball and put it on top of a hill. As the snowball starts rolling (you start paying off your debts), you gradually pick up speed and the snowball will get bigger and bigger until you eventually land on the bottom (where all the debts are paid off).
The debt snowball strategy is easy to use. You need:
- Make a list of all debts and the amount you owe (excluding your mortgage).
- Order your list of debts from lowest to highest.
- Find out how much money you can afford to invest in paying off the debt, taking into account all the minimum payments.
- Start investing the surplus money in your smallest debt while continuing to deposit the minimum monthly balance on all other debts.
- Once the smallest debt is paid off, move whatever you paid against that debt to the next smallest debt, while maintaining the minimum monthly balance due for all other debts.
The Debt Snowball Method is designed to give you quick winnings. Paying off the smallest debt quickly helps you stay on track and look forward to continuing with your debt repayment plan.
When To Pay Off Zero Interest Loans In A Snowball Of Debt
Since the debt snowball strategy only looks at the amount owed on the loan, the interest rate will have nothing to do with how the debt is paid off. When you list all the debts for your snowball, you only count the amount owed. Then, by starting with the smallest amount payable, you will start to kick-start your snowball, no matter how much interest you owe on each debt.
This is not the case if you choose another popular method of paying off debt – the debt avalanche. The debt avalanche method begins by listing loans in descending order of interest rate. This will place the 0% loan at the end of your payout list.
Regardless of which repayment strategy you choose, make sure you understand what is written in the small print if and when your interest rate changes from 0% to a higher one. When the introductory offers expire, the interest rate can jump significantly.
If you plan on using the debt snowball method, you don’t have to worry about finding a place to borrow at 0%. However, if you want to save as much money as possible by attacking higher interest rate debts first, you will want to opt for the avalanche debt repayment method instead – or consider a hybrid method that treats small and large balances differently.
Brooke is a freelancer specializing in financial wellness and high tech. She has a passion for everything related to health and spends her days preparing wholesome recipes, running around and snuggling with a good book and her fur babies.