Researchers say ‘snowball method’ is the best way to pay off debt

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Created February 28th, 2018 by Alex Watts

When you’re trapped in debt it can sometimes seem like there’s no light at the end of the tunnel.

When deciding how to tackle financial difficulties and choosing which debts to pay off first, it can be difficult to know where to start.

The Snowball Method

But, as reported by Business Insider, researchers now believe that the ‘snowball method’ is the best way to pay off your debts.

This means prioritising accounts with smaller balances, rather than those with higher interest rates.

The study from the Harvard Business Review found that the factor which made the biggest impact on how hard participants worked to pay back virtual ‘debts’ wasn’t the amount they were paying back or how much was left in the account afterwards, but rather the percentage of the balance they ended up getting rid of.

Although it might make more sense mathematically to pay down accounts that carry the highest interest rates first, the researchers found that it was more motivating for people to see small balances disappear.

Remi Trudel, one of the HBR researchers, wrote: “Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.”

To use the system effectively, follow these three steps:

1. Figure out how much you can dedicate to paying off debt now. The higher you can make that initial lump sum, the less you’ll have to pay later.

2. Figure out how much money you can put towards your debts above and beyond the minimum monthly payment.

3. Make a note of all your debts, from smallest to largest, including interest rate and minimum monthly payment for each, and work your way down the list to pay off your debts.

Ineffective strategies

After analyzing data from 1.4 million credit card holders in the UK who use more than one card and don’t pay off their entire balance every month, The National Bureau of Economic Research found that people choose ineffective strategies for paying off their debt.

Rather than using the snowball method, many people opt instead for “balance-matching”, in which the amount they pay on each card per month is proportional to the total amount owed on that card.

While this system is better than only making the minimum payment, it still caused debtors to rack up a substantial amount of interest.


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