Question

Gabe has an outstanding balance on four different credit cards. Which method of paying off his credit card debt will save him money and results in the fastest payoff of one of the debts?

Question 1 options:
1) paying the minimum balance each month

2) making fixed payments

3) snowballing his payments according to the lowest balance

4) snowballing his payments according to the highest interest rate

Answer 1

the CORRECT option is option 1) paying the minimum balance each month.

Explanation:

Answer 2

Answer: 3

The method of paying off his credit card debt will save Gabe money and results in the fastest payoff of one of the debts is 3) snowballing his payments according to the lowest balance
Mathematically, it makes sense to focus on paying the debt with the highest interest rate first because this strategy minimizes the amount of interest you're paying overall, which can save you a lot over time. However, the Harvard Business review found an opposite approach and proven most effective, known as the snowball method which prioritizes paying the lowest debt first regardless of interest rate. This is done by listing out all of your debts, from the lowest to the highest amount and pay only the minimum balance on each one, except for the lowest. For the lowest, pay as much cash as possible each month until payment is completed. Then move on to the second-smallest debt and so forth.