What Is the Debt Snowball Method?

The debt snowball method is a debt repayment strategy that focuses on paying off your smallest balances first. This approach helps you gain momentum and stay motivated as you eliminate each debt, one by one. While it’s not the only way to pay off debt, it’s a valuable method if you’re disciplined and follow the steps. Here’s how it works and what to consider before using it.

How to Pay Off Debt Using the Snowball Method

To use the debt snowball method, follow these steps:

1. Set up automatic payments on all of your accounts for the minimum amount due.
2. Review your budget for extra cash flow you can put toward your debt each month.
3. Add the extra amount to the payment on your smallest balance.
4. Once that debt is paid off, add the full amount you were putting toward it (the minimum payment plus extra) to your payment on the next-smallest balance.
5. Continue this process until all your debts are paid off.

Note: If you’re paying down credit cards with the snowball approach, avoid adding more debt to them once you’ve paid off a balance.

Debt Snowball Example

Let’s say you have three loans and two credit cards with balances you’re trying to pay off. Here’s an example of how the debt snowball method works:

Using the debt snowball method, you would first tackle the debt on credit card 2, as it has the lowest balance. When that’s paid off, you’d add the payment you were making on credit card 2 to the minimum payment for credit card 1, and so on until all your debts are paid off.

Pros and Cons of the Debt Snowball Method

Pros

• Helps you save money: Even if you can’t put extra money toward your debt right now, the snowball approach can help you save hundreds or even thousands of dollars in interest.
• Accelerates your debt payoff: As you utilize the strategy’s snowball effect, you may be able to cut years off of your debt repayment plan, freeing up that cash flow for other financial goals sooner.
• Can help you stay motivated: Paying off smaller balances early on can help you stay motivated toward your goal.

Cons

• May not maximize your interest savings: If you want to save as much money on interest as possible, the debt avalanche method may be a better option.
• Can take a bit longer: If your largest balances also have your highest interest rates, it can take longer for you to pay off your debt.
• You’ll need to stay focused: The debt snowball approach won’t magically change your habits, so you’ll need to stay focused on your objective.

Other Ways to Pay Off Debt

As you consider whether the debt snowball method is the right move for you, here are some other potential approaches you can take:

Debt Avalanche Method

The debt avalanche method works similarly to the snowball approach, but instead of paying off the lowest balances first, it targets the accounts with the highest interest rates. The idea is that by eliminating the most expensive debts first, you’ll save more money on interest.

Debt Consolidation

Consolidating debt with a personal consolidation loan or a balance transfer credit card involves paying off multiple balances with a new loan or card. Benefits may include a lower interest rate and a more simplified repayment plan. However, these options are best if you have good or excellent credit, and it’s important to still have a strategy to pay down the debt once you consolidate.

Credit Counseling

If you’re worried about falling behind on payments, you may consider consulting with a credit counselor who can offer personalized advice. If you have a lot of credit card debt, the counselor may suggest a debt management plan, in which the counselor negotiates a lower interest rate and monthly payment, giving you an affordable repayment plan. There are fees associated with debt management plans, and you may also be required to close your credit card accounts.

Keep an Eye on Your Credit Throughout the Process

As you work on paying down your debt, check your credit scores regularly to keep track of your progress and also to make sure you don’t hit any snags. If you’re paying off debt to improve your credit and incorrect or fraudulent information gets added to your credit reports, it could halt your progress. And if you don’t catch such things early, it could do more damage over time.

Eliminating debt and improving your credit history won’t happen overnight. But if you’re disciplined and stick to your strategy, you could save years’ worth of time and interest charges, both of which you can spend working toward meaningful and exciting financial goals.