Phase 4: Clear Every Debt Above 10% APR

How the debt snowball works

Write down every debt except the mortgage with its balance, minimum payment and rate. Sort by balance, smallest first, ignoring the interest rate entirely. Pay the minimum on everything, and throw every spare dollar at the smallest balance until it is gone.

When it clears, its payment does not go back into your life. It joins the attack on the next debt, so the amount you fire at each target grows as you go. That is the snowball: the payment rolls forward, and the last debt gets hit with the combined payments of all the ones before it.

• List every non-mortgage debt with balance, minimum and rate
• Order by balance, smallest to largest
• Pay minimums everywhere, all spare cash at debt number one
• Roll the freed payment into the next debt without pausing

Snowball or avalanche: which order should you use?

The avalanche pays the highest interest rate first and is mathematically cheaper. On a typical mixed set of balances the difference is usually a few hundred dollars and a month or two — real, but small compared with the cost of abandoning the plan.

The snowball wins on completion rates because early wins are visible. If your rates are wildly uneven — one card at 27% and everything else under 7% — a hybrid is sensible: clear one small balance for momentum, then attack the expensive one.

What to do about the car payment

A car loan is a debt like any other in this step, but it is often the largest single one. The test many people use: if the total value of your vehicles is more than half your annual income, and the loan will take more than about eighteen months to clear at snowball speed, sell it and drive something cheaper until the plan is further along.

That is a harsh rule and it is not always the right one. If losing the car costs you the job, keep the car. Run the payoff and the replacement cost side by side before deciding.

Student loans in Phase 4

Federal student loans belong in the list. They are not mortgage debt, and deferment simply moves the problem. The exception worth thinking hard about is an active forgiveness track: if you are genuinely on course for Public Service Loan Forgiveness, aggressively overpaying a loan that is scheduled to be cancelled destroys money.

Check the repayment plan and the qualifying-payment count before choosing. Everyone else puts the balances in the list by size like every other debt.

How long Phase 4 usually takes

Most households doing this seriously clear non-mortgage debt in eighteen to thirty months. The variable is not the interest rate; it is the size of the gap between income and spending, which is why the budget work from step one carries straight into this step.

Two things end this step early: a raise you do not absorb into lifestyle, and a lump sum you refuse to spend. Two things stall it: new borrowing, and treating the starter emergency fund as a spending account.