Definition of Debt Snowball
What is the definition of the "debt snowball" strategy? How does the "debt snowball" method of repaying debt work?
The Debt-Snowball method, which has been popularized by Dave Ramsey, is a debt-repayment strategy that involves paying off smaller debts first.
Here is how it works:
A person who owes money to multiple creditors lists their total outstanding debts from the smallest to the largest, as well as the minimum payments for each debt.
The person dedicates a specific amount to money to repaying their debts every month - let's say $500.
First off, minimum payments are made on all of the debts that are outstanding.
After the minimum payments are made, any money that is left over from the $500 is applied to the smallest debts. Once these debts are paid, then any excess money is applied to the progressively larger debts until everything is eventually paid off.
Some people argue that this is not the right way to repay debt. They argue that the debt with the highest interest rates should be paid off first.
However, proponents of the "debt snowball" method argue that it is psychologically beneficial to eliminate debts, and that is why the "debt snowball" method is so successful.
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