Final answer:
The 2) debt snowball method is a debt repayment strategy where all debts are listed in ascending order by balance, with minimum payments made on all but the smallest debt, which is targeted with larger payments.
Step-by-step explanation:
The preferred method of debt repayment that includes a list of all debts organized from the smallest to the largest balance, with minimum payments made on all debts except the smallest, which is paid off with the largest possible payments, is known as the 2) debt snowball method.
The idea behind the debt snowball is that by completely paying off the smallest debt first, you gain momentum and a sense of achievement, which can help you stay motivated as you move on to larger debts.
It's important to note that while you're paying the minimum on other debts, you should pay as much as you can on the smallest debt to eliminate it quickly.
When you carry a balance on a credit card, a minimum monthly payment is required, and this payment includes both the principal and the interest.
The interest is the charge for borrowing the money, and it is calculated by multiplying your balance by the interest rate.
If you only make the minimum payments, a significant portion of your payment goes towards interest, rather than reducing the principal.
This can prolong the repayment period and increase the overall amount paid due to accumulating interest.
By using the debt snowball method, you can reduce the number of outstanding debts more quickly, which can be psychologically rewarding and also can potentially improve your credit score by demonstrating a pattern of successfully paying off debts.
This method works well for individuals who need the psychological wins to keep motivated in their debt repayment journey.