A Debt Snowball Dilemma: The Promotional Balance

The Debt Snowball Method

If your looking to get out of debt, you're bound to run into the phrase Debt Snowball again and again. And with good reason - its a great strategy! You'll typically see it outlined in one of two ways: lowest balance first or highest interest first. There are advantages to each. Ultimately, the best method for you is the one you will stick to. It takes focus and determination to climb out of the hole. Here's a quick overview of two common strategies:

Lowest Balance First

1. List all of your debt in order from the lowest balance to the highest.
2. Designate an amount to put towards debt each month... as much as you can spare.
3. Pay only the minimum on all debts except for one with the lowest balance.
   
4. Put the rest of the into the lowest balance debt and don't stop there. Anytime you run into a few extra bucks above and beyond your amount from #2 go ahead and throw that at your lowest balance debt too. Those 'debt snowflakes' will make a huge impact on your total debt snowball :)
5. When your first debt is paid off, don't change your debt payment amount. Just 'snowball' the funds into the next debt on your list!
   

By using the lowest balance method you should start seeing results pretty quickly. Dave Ramsey recommends this method for just that reason - its psychologically satisfying to start eliminating debts right away. This is a great way to start if you have tried to get out of debt before and failed. Say you pay off a few small balances on store cards within the first 4 months. You're list is already two debts shorter! These small victories might be just the motivation you need to stick with the plan. I know it helps me to set small monthly goals when the long term goal of debt reduction seems insurmountable.

Highest Interest First

1. List all of your debt in order from the highest interest rate to the lowest.
2. Designate an amount to put towards debt each month, as much as you can spare.
3. Pay only the minimum on all debts except for one with the highest interest rate.
4. Put the rest of the into the highest interest debt and don't stop there. Anytime you run into a few extra bucks above and beyond your amount from #2 go ahead and throw that at your highest interest debt too. Those 'debt snowflakes' will make a huge impact on your total debt snowball :)
5. When your first debt is paid off, don't change your debt payment amount. Just 'snowball' the funds into the next debt on your list!
   

The highest interest first approach makes the most sense financially. By attacking the highest interest debt first you are reducing your total finance charge. That means more money is going to the principal balance all the time. Those small savings compound quickly and help to accelerate the process.

I decided to attack the highest interest rate debts first. I had called and asked them to reduce my rate several times. When they refused, I took it personally. Each debt snowflake was a small victory in my mind. I also like saving money and reducing my overall finance charge so that was just a bonus. I was able to stay focused even though it took me six long months to eliminate my highest interest balance - which happened to be my highest balance too.


A Debt Snowball Dilemma: The Promotional Balance

If you've decided to pay highest interest first, you've got financial advantages in mind. So how do you classify that promotional rate on a balance transfer?

In short, there is no right answer for every situation. It depends on your balances, interest rates, and the amount you have available for payments. If you're not into math, I'll guide you through a shortcut. Hey, even if you're into math... there is a shortcut.

Let me begin with my motivation for this post. I just paid off my National City Visa. I transferred a balance to that account about six months ago at 0%. After that the standard rate would go up to 19.99%, by far my highest interest debt.

When I started my debt snowball, I had a total of $500 designated for payments. At that point it made the most sense, financially, to target the NC Visa. Later I gained momentum and decided to put over $1000 towards debt payments. I never thought to re-evaluate my debt snowball, but I should have.

Maybe you've seen this Snowball Calculator before? I think this is a great tool, but its limited when it comes to evaluating this situation. Go ahead and enter all of your information when you're trying to get an idea of a timeline, but lets just focus on two accounts when you're trying to determine a snowball target with a promotional balance.

Using Snowball Calculator to Determine a Target with a Promotional Interest Rate

1. Gather the info for your top two highest interest debts.
2. Enter the information, including the promotional period into the snowball calculator.
3. Check to see that interest order is actually saving you money!
   

We'll use my data as an example.

Here were my top two highest interest debts as of six months ago:

• National City Visa:
  
• $7000 balance
• 0% for 6 months
• 19.99% Standard APR
• 2% minimum payment
  
  
• Prosper Loan:
  
• $5000 balance
• 14.94% Fixed APR
• $173.18 Fixed Payment

When I had only $500/month designated for debt repayment it made sense to target National City. The snowball calculator says that paying NC first would save me $152 .

However, once I started putting at least $1000/month towards debt repayment the tables turn. Now paying NC first will cost me $131 more!

In my opinion, $131 is a pretty big snowflake to miss out on just because I forgot to double check my method. Of course, I cut my total interest payments by over a thousand bucks when I increased my payment amount. Paying more is always better, but in cases like this you might want to make sure you have the right target.

I figured this when it was too late, but maybe you can learn from my mistake!

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Read More about Debt Snowball Methods:

• Jamie @ Paid Twice likes the Highest Interest First Method and she's also a leader in the Snowflake Revolution! Read about how to Develop a Snowflake Mentality.
  
• JD @ Get Rich Slowly chose the Lowest Balance First Method
• Trent @ The Simple Dollar used his own Scared Straight Method
• Check out an Illustrated Debt Snowball @ No Credit Needed
• Flexo @ Consumerism Commentary provides tips to transform your debt snowball into a Debt Avalanche

Read more about Debt Reduction @ Me vs Debt:

• 7 Strategies to Reduce Finance Charges
• Prosper Debt Consolidation Loan - Tips for Potential Borrowers
• On Track to Meet my Goals (Check the stats!)
• When it comes to snowflaking...