How To Choose Between The Snowball Method And The Avalanche Method

There are many options to get out of debt. You have debt consolidation loans, debt management, credit counseling and debt settlement. When things are really very bleak, you also have the option to file for bankruptcy.

But these options will either damage your credit score and/or require you to hire a debt professional. If you want to keep yourself from both of these, you should try opting for either the snowball or the avalanche method.

These two generally have the same process. Both of them will require the consumer to list their debts according to priority. This ranking will allow the consumer to focus on one debt (the priority) while taking care of the minimum payment for the rest. The idea is to get your debt payment fund (the highest that you can allocate without compromising your basic needs) and distribute it in your list based on the minimum requirement of each account. Once you have done that, the extra amount that is left in your fund will be put into your priority debt. That will help you pay off that first debt a lot faster while keeping the other creditors generally happy. When that first debt is done, you will get the amount initially allocated to the first debt and put it towards the second debt on your list. It will be a lot bigger since you combined the first and second debt payments. It should complete the second debt payments a lot faster. When this is is completed, you will proceed to the third - and so on and so forth. You will repeat the process until all the debts are paid off.

The difference between the snowball and avalanche is what will be the priority. In the snowball method, the priority will be the credit account with the lowest balance. For the avalanche method, the priority will be the debt with the highest interest rate.

So how will you choose between the two to maximize the efficiency of the debt solution?

It all depends on your personality. If you think that you need the emotional motivation of an early success, you should go for the snowball method. By prioritizing the lowest balance account, you will pay that off a lot faster.

But if you are the type who is more concerned about the money that you will save, you may want to go for the avalanche method. Paying off the high interest debt first will help lower the money that will be wasted on the interest amount. It could take you longer to get that first debt payment completion but it should be worth it.

These are the major issues that you have to consider when choosing between the two. It is important that you commit to the debt payment plan that you have chosen to ensure your road towards debt freedom.

And once you have achieved debt freedom, make sure that you will stay out of debt. Practice the right financial management skills that will keep you from incurring unnecessary debts in the future.

Choosing a Debt Relief Option Based on Your Financial Situation

If you are in debt and you want to get out of it fast, there is a specific debt relief option that you take. It all depends on your financial capabilities. If you have to choose an option to help you get out of debt, you need to consult your finances first. It will tell you just how much you can afford to put aside for your debt payments.

While all financial situations are unique, we can classify them into three different categories. The first involves those with enough income for both basic expenses and debt payments. The second involves those who have enough for basic expenses but can barely meet the minimum payments. The last are those who have barely enough for the basic expenses and nothing for their debts.

Among the three, the first category is probably the one that you want to be in. Being in debt is not a problem as long as you have the means to pay for it. In this financial situation, you can opt for the snowball or avalanche method wherein you will pay for all the minimum of your credit card debts while choosing a few priorities. Your priority debts will be paid more than the minimum requirement.

If you want to consolidate your debts, you can opt for debt consolidation loans or debt management. Both will allow you to have lower monthly payments (at least, lower than what you average at the moment) by stretching your payment term.

But if you fall under category two, you are in more trouble than the first. Having enough to feed your family and take care of basic necessities is comfort enough but if debt collectors are bothering you, it is quite hard to ignore the stress of debt. However, there is a debt relief option that you can avail if you still want to pay your debts. This option is known as debt settlement.

This option involves a risk because you will be defaulting on your payments to prove to the creditor that you are in a financial crisis. As you wait for your creditor to take notice that you have stopped paying them, you will put aside money as your settlement fund. You or a debt negotiator that you will hire will talk to your creditor to get them to settle with you. The idea is to agree to a settlement amount that you will pay for and once you have completed that, the creditor will forgive the rest of your debt.

In the last scenario, having barely enough for basic necessities, let alone debt payments, will point you towards bankruptcy. This is the least liked by both debtor and creditor because of credit implications and debt discharge, respectively. But if you have no asset to liquidate, this is the best option for you.

Get Rid of Debt Through the Snowball Method

If you are one of the lucky few with a steady income to pay off the minimum of their debts, you can possibly adapt the Snowball Method. This is a debt payment approach that will point you towards paying the debt with the smallest balance first. It is not like the Avalanche Method that prioritizes the high interest rate credit obligations.

Financial experts like Dave Ramsey prefer the snowball method because it has the most success rate compared to the other. Since the debtor is prioritizing the debt with the smallest balance, the morale will be boosted much earlier through the satisfaction of a debt completely paid. In comparison, the other method may take longer since the concentration will be on the debt with the highest interest and may or may not be the one with the smallest balance.

The belief that the early taste of success provided by the snowball method has a higher chance of motivating the debtor to go on and work on the next debt. It provides more psychological benefit in putting the right attitude and perspective into the debt relief effort. It will definitely be slow going at first but it builds up momentum as more debts are paid off.

To use this debt payment approach, you need to list down all your debts (literally!). Include the amount of debt owed, the creditor, the remaining balance, minimum payment, interest rate and other fees and charges. Arrange the debt from lowest to highest - the topmost spot is given to the one with the lowest remaining balance.

After you have listed down everything, get your monthly income, remove all the basic necessity expenses (food, rent, utilities, clothing, transportation, etc) and you will get your disposable income. This is what you will divide among all your debts. Distribute that income to pay off the minimum of all your credit obligations. Whatever is left will be added to the debt on the topmost part of your list. When that debt is paid, you will get the amount allotted for that and you will add it all to the second debt on the list. After completion, you will add the payments from the first and second debt to the third - until you have fully paid all your debts.

Some people prefer the other payment method because the idea of tackling the high interest debt first will lower the total interest that they will end up paying. However, this will only prove to satisfy the logical thinkers and those who have the right amount of discipline and perseverance. But if you think that you need the early motivation, you should be safe with the snowball method.

If you wish to see other options, go to National Debt Relief to compare other debt solutions. You can choose between debt management, debt consolidation loans, debt settlement and bankruptcy. Talk to a debt relief expert with no obligations - the initial consultation is always free.