Feeling Trapped in Debt Snowdrift?

Dig Out With Snowflake or Snowball Debt Elimination Methods

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Feb 23, 2015, 12:54 ET

CLEVELAND, Feb. 23, 2015 /PRNewswire/ -- There's no shortage of solutions to eliminating debt, including the perennial favorite methods respectively dubbed "Debt Snowflake" and "Debt Snowball". Both methods require identifying debt, setting payment priorities and then using money saved from eliminating one debt to pay off another, and then another. Here are tips from KeyBank to help you decide whether one or both of these solutions can help you shovel clear of debt:

The Debt Snowball: Like relatively immediate gratification? This method lets you start with small debts that, once paid off, give you more money to tackle larger debts, up to and including major debts such as mortgage, vehicle and student loans.

You can start the Snowball rolling by listing all debts, ranking them from lowest amount to highest amount of debt. Total all minimum amounts. Pay as much as you can on the smallest account balance, making minimum payments on the rest of your accounts. The more you do to eliminate this first small debt, the more quickly you will see progress toward your goal.

Once the first account is paid, roll that payment into the next lowest account, again making minimum payments on the higher accounts. Just like a snowball grows with each roll, payments on each subsequent account grow until your targeted debts are paid.

The Debt Snowflake: Like to make change one small step at a time? The Debt Snowflake method lets you chip away at accumulated debt or a major single debt such as a mortgage or student loan by making small payments in addition to your minimum payments.

Here's how it works: Again, list all your debts, from lowest balance to highest balance. (If you have several relatively low balances, list those from highest interest rate to lowest interest rate.) Add the minimum monthly payment owed each.

Next, identify any sources of extra income. For example, if you're paying $30 less a month at the pump, you could add $30 to your monthly payment on a designated debt. Keep a change jar? Empty the contents every week and pay that amount toward your designated debt.

Yes, these amounts are miniscule, particularly when stacked against a mortgage, student loan or vehicle loan. And yes, it will take time to see a big difference in any given debt. But yes, you will make progress, one snowflake at a time.

The Basics: Whatever method you choose, be sure to check with your lenders and financial institutions about prepayment penalties, or fees associated with making recurring bi-weekly payments rather than a single monthly payment.

Ask lenders to apply extra payments to the principal balance rather than applying the extra money to your next regular payment. Whether you're cutting debt via Snowball or Snowflake, you want your extra payment to help lower the principal, rather than going toward principal and interest.

Speaking of interest, consider ranking your debts by interest rate charged rather than debt amount. Depending on the debt, you might save money by tackling the high interest rate debts first.

Finally - once a credit card account is paid off or paid down, resist the urge to run up new debt unless you have an unexpected major expense or a plan for prompt repayment. Otherwise, you could find yourself snowed under all over again.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.

About KeyCorp

Key traces its history back more than 160 years and is headquartered in Cleveland, Ohio. One of the nation's largest bank-based financial services companies, Key has assets of approximately $90.8 billion. Key (NYSE: KEY) provides deposit, lending, cash management and investment services to individuals, small and medium-sized business under the name KeyBank National Association. Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name.

For more information about Key, visit www.key.com, or follow Key on Twitter at @KeyBank_News or @KeyBank_Thrive.

SOURCE KeyCorp