International Baccalaureate (IB) Practice Exam

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What is the key principle behind the debt snowball method?

Paying by interest rate
Focusing on the smallest debt first
Using loans to consolidate debt
Prioritizing minimum payments

The correct answer is: Focusing on the smallest debt first

The key principle behind the debt snowball method is focusing on the smallest debt first. This strategy advocates for individuals to tackle their debts starting with the least amount owed, regardless of the interest rates. The rationale is that paying off smaller debts quickly provides psychological benefits and motivation. The satisfaction of eliminating a debt can fuel continued efforts in managing other debts, creating a positive reinforcement cycle. The snowball effect then plays out as the freed-up funds from paid-off debts can be applied to larger debts, helping individuals gain momentum in debt repayment over time. This approach contrasts with methods that prioritize debts by interest rates, consolidate loans, or merely maintain minimum payments without actively reducing the overall debt load.