Snowballing, 2 techniques

Kevicho

So far I have come across two techniques, both which have pros and cons

The first one is by paying off in order of Interest
The 2nd by paying off in order of speed to pay off.

Snowballing is basically the process of setting a method or order of paying off cards, which gathers momentum as you pay off cards.

For example, we have 4 card each with differing debts and minimum payment ammounts.
However before We start out need to fill in a SOA, to find where we can save money, and where the problems arrise.
The aim of an SOA is to cut as much non essential ependiture to give you the most money available for repayments, you could call this your repayment ammount.
Fundamentally say we have £300 a month spare and 4 cards, we account for the minimum payments, which for example add up to a total of £150.
That leaves us with £150 for what we shall call your repayment margin

What we do with that money is use it all to pay towards one credit card, this enables us to pay one card off at a time to make the process go faster.

Not the two ways to do this

With 4 cards we have (for example purposes)
Name amount APR min payment
Visa 1 1000 18% 30
Visa 2 250 6% 15
SC1 565 29% 50
Visa 3 2500 25% 55

The way to do this with interest rate snowballing is to pay the remaining 150 pound in order or the highest interest

Which is SC1 (storecard 1)
Once we clear SC1, can raise our margin to 200, which is our original 150 + the 50 minimum payment (hence the term snowballing, our amount increases as we pay more money).

Then follows as Visa 3, visa 1 and visa 2.

This means that we are clearing the debt which has the most interest to the pound and overall should save some interest.

The advantages of this are:
With fewer cards with higher interest rates then this will save you money with interest, in fact it will work with lots of cards but to a lesser extent

The disadvantages are that sometimes this can take a long time to pay one card, especially with a big balance so you need dicipline and ways to keep your motivation going

The next method is by repayment by speed to pay off

Say we have the same cards
Visa 1 1000 18% 30
Visa 2 250 6% 15
SC1 565 29% 50
Visa 3 2500 25% 55

We can then take our 150 a month and devide each card by that amount to see this
balance apr min p months to pay off

Visa 1 1000 18% 30 (180) 5 1/2 months
Visa 2 250 6% 15 (165) 1.6 Months
SC1 565 29% 50 (200) 2.85 months
Visa 3 2500 25% 55 (205) 12.2 Months

This time we pay off in order of the least time which is VISA 2 this takes us the least time to pay off and so we can move on to SC1 a lot quicker (plus we add the 15 we now have from the minimum payment of visa 2 that we dont have to pay anymore), then we do Visa 1 and Visa 3

I think the main advantages of this card, is that in similar circumstances to this you have a lot more motivation because you are clearing cards quicker (until you get to the bigger cards) and that should help motivate you through the cards which require a bit of a slog

The disadvantage is that you may pay more in interest

The best advice i can give you is to create a spreadsheet with these figures, and test both to your situation, if you find the one that works best for you, then use that one

Hope this helps

Kev

dinkylou

Kev,

A great post which will help explain to many about snowballing and how it is done.

fairylights_2

How good is that? It's one of the things that took me the longest to get my head around. I'd have to say if you have big debts then surely paying off fastest first makes no sense? We kept a track of our total debt, and watching that go down was enough. MSE wise it makes less sense to pay off a lower apr first just to chuck a card in the bin ... Just my humble opinion though ...

CLAPTON

the art of snowballing is to pay off the card with the highest APR first then the next then the next.
this will reduce your debt the fastest and make your debt free day earlier.
if there are motivational issues (and aren't there always) then best to consider them separately.

lazy&indebt

Good explanation! I suppose it depends on your circumstances thought. Which would you concentrate on first on my debts?:

Car (HP) - £4215. (final payment £2,900 in AUG 2008) £150 per month 0%
Loan - £4980 £83 per month 11%apr
Card - £2700 £54 per month 0% apr until 5 months then 1.9% apr for a further 6 months

CLAPTON

loans are different to credit cards because you are often locked in and so repaying early does not necessarilly reduce your total interest charge
so what are the terms and conditions of the HP and loans as regard to early repayment or overpayments?

nicola1982_2

https://www.whatsthecost.com has a snowballing calculator - copy to a spreadsheet and you've got a pretty good motivational tool!

lazy&indebt

I don't think I can make additional payments to car or loan, all or just the min payment. What I was thinking of doing is paying off card and saving every bit of spare cash in my instant access ISA (4.75% AER tax free!) until I have enough to pay one or both of them off.

Broken_hearted

Great thread, I can understand what you mean with regards to motivation. We will hit this next year as thats when we tackle the two big debts Halifax and Liverpool victoria. These make up £10,000 of our debt and they never seem to come down. Al least they are interst free (both with DCAs)lol.

CLAPTON

lazy&indebt
yes good plan.
best to save in your ISA (in fact delay paying off the CC if it is 0%, until that changes to a higher interest rate than your ISA)
may be worth rereading the T&Cs for the loan and HP just in case there is a benefit is overpaying or repaying early but otherwise keep that ISA going.

lazy&indebt

That was my plan. If i am earning more interest than I am being charged anyway! Thanks for the advice. Hoping to save about £3k per year