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Why is the debt snowball costing you so much money?

You may have heard about the debt snowball in the past. This is the idea that you can roll payments from one debt into another once you've paid off the original debt. By adding more and more money to the payments as you move forward with paying off your debts, you are able to pay off your debt more quickly.

This so-called debt snowball may not be the best option for you, though. The snowball suggests that you pay off the lowest debt first, but that doesn't account for interest rates or other charges that may cost you in the long term.

A better strategy may be the debt avalanche. With this technique, you prioritize your high-interest debts first. This saves you money in the long term. Here's an example.

If you have two debts for $100 each and 5 percent interest on one with 10 percent interest on the second, you know it's in your best interest to pay off the $100 debt with 10 percent interest first. If not, you will be charged $10 in interest at the end of the term. Comparatively, if you pay off the $100 debt with 10 percent interest first, you save five dollars in interest by the end of the term.

While this is a simplified example, it shows why you have to take interest into consideration. Interest compounds into the original debt while you go further and further into debt. Avoid this by taking out the high interest rates first. It may take longer, but you will save money.

If you're looking at your options for getting out of debt, your attorney can help. From debt avalanches to negotiating with creditors, there are plenty of options open to you.

Source: Magnify Money, "How Much Money Is the Debt Snowball Method Costing You?," Matt Becker, accessed July 27, 2017

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