Debt snowball payoff order: How to decide?
Much of the advice available about designing a debt snowball program for your debt payoff plan revolves around only two main factors: interest rates and amount owed. These are excellent pieces of information to have when you’re laying out your plan, but they can’t be the only factors you take into consideration.
Why aren’t interest rates and amounts owed the most important factors?
First, interest rates and amounts owed do exclusively determine the amount of money you’ll ultimately be paying back. Time is a factor, but not in the same sense that interest rates and money owed are.
If you want to payoff your debt in a way that saves you the most money over the long term, based on your current situation, you need to choose to pay off your debts with the highest interest rates first. A higher interest rate means you pay back more dollar for dollar on a debt. If you owe $1,000 at a 10% interest rate, your monthly interest payment (using simple interest) is about $8.33. If you owe $1,000 at an 18% interest rate, your monthly interest payment is about $15. This is a simple way to decide what comes first in your debt payoff.
If you’re more interested in the motivational aspects of paying off debts quickly, you can start with the smaller amounts first and work your way up to the larger debts. This gives you a boost every time you pay something off, inspiring you to keep at it.
However, sometimes other issues come into play when you start working on your debt payoff plan. In fact, you should always consider other factors in your decision-making.
My problem
I have several smaller debts with low interest rates. I also have a few with larger balances that have higher interest rates.
My ideal plan would have been to pay off debt in a way that saves me the most money. I like money and I especially like it when I can keep as much of it as possible in my pockets.
My debts
| Debt | Interest Rate | Amount Owed |
|---|---|---|
| American Express | 3.99% – until paid | ~ $7,500 |
| Home | 6.5% | ~ $139,000 |
| Truck | 4.49% | ~ $6,500 |
| Camper | 8% | ~ $18,000 |
| Student Loan | 3.5% | ~ $14,000 |
The thing is, I would like to pay off the camper before the American Express bill because the interest rate is so much more favorable. However, with the current state of the economy and the ever-changing nature of credit card agreements, I worry that my American Express credit card terms will change drastically and unexpectedly and I’ll lose that lovely 3.99% interest rate until the balance is paid off. Then, depending on how high the rate jumps, any savings I could have accumulated by paying on the 8% debt first would be lost in a matter of months.
I have friends who are dealing with unscrupulous credit card companies right now and I have little faith in them myself these days. My biggest fear is that before the new credit card agreement rules go into effect later in the year, many credit card companies might try to take advantage of as many loopholes in the credit card agreements as possible to keep from having customers locked in with very favorable terms long-term.
Maybe I’m overly cynical, but I don’t think so. Do you?
All the reasons I mention above are reasons in favor of taking your entire financial picture into account when you start laying out your debt repayment plan or your debt snowball.
Arrange your payoffs to suit you and your needs and don’t worry so much about following any particular person’s specific method for deciding on a debt payoff order. As long as you’re paying something down with the intention of paying it off, you’re making progress!
March 9th, 2009 at 7:00 pm
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