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Snowballing is the name given to a common strategy for strategic debt repayments.  The basic idea is that you make the minimum payments on all of your debts and focus the rest of your disposable income on the most pressing debt.  Snowballing only works if you can manage to make the minimum repayments on your debts, otherwise you will need to look at a more formal debt-management solution.  It can seem like a very long slog, it can be a very long slog, but it does work and it keeps your credit rating intact, which may come in handy later down the line, for example, if you need a mortgage.

The key point to successful snowballing is choosing your top-priority debt

There are basically two forms of debt, commercial and non-commercial, in other words, loans from companies and loans from family and friends.  The former will definitely be on a formal basis and will generate interest charges, the latter may not.  This means that from a financial perspective, it usually makes the most sense to pay back commercial loans before you pay back loans to family and friends, however, from the perspective of maintaining good relations, it may be better to focus on paying back family and friends.  Only you can make this choice (possibly after a discussion with the people concerned).

NB: If there is even the slightest possibility that you may need to enter into an insolvency arrangement, then you should consider documenting and formalizing any loans from family and friends, at least significant ones, that way they will have a claim on your assets.  If you don’t then be very careful about prioritizing repayments to family and friends over repayments to commercial lenders as this might be viewed negatively in subsequent insolvency proceedings.

Highest interest payments versus the smallest debts

The advantage of prioritizing the debt with the highest level of interest is that, from a purely mathematical perspective, this is the debt which makes the greatest difference to your finances.  The advantage of prioritizing the smallest debts is that this will give you an easy (or at least easier) win, and it may help to set your credit record on the road to recovery, which could have benefits further down the line, for example, by making it possible for you to transfer your remaining debt to a lower-interest product.  If you really want to (start to) give your credit record a boost, then you will need to close off the credit products once you have cleared the balance.  You may, however, wish to keep one of them open for use in emergencies and only in emergencies.  Basically, when you are in a pinch, it may help to have the reassurance of knowing that somebody will lend you money, instead of having to worry about applying for it and maybe being turned down.

Finessing the basic process of snowballing

While the basic process of snowballing is very straightforward, you can always look for ways to finesse it.  For example, let’s say you’ve taken out cash on credit cards.  This is really bad both in terms of interest charges and in terms of your credit record, so you really want to clear the cash balance as quickly as humanly possible.  One approach is to use your credit card to make essential purchases and then increase your repayment by the cost of those purchases (i.e. the money you would have spent making them if you had paid with your debit card).  Your lender must apply repayments to the highest balance first, which will be the cash withdrawal, so even though your overall balance will only reduce by the amount of the minimum repayment (minus interest charges), the interest expense will go down.

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