How does snowball debt work

The debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones—kind of a "tackle the easy jobs first" approach. You make a list of all the outstanding amounts you owe, in ascending order of size. You target the first one to pay off first, putting as much extra money into each payment as you can afford.

The others you pay just the minimum on. When the first debt is settled, then you target the next-smallest one for the extra-payment treatment. Let's see how the snowball effect works on our previous debt example. The snowball method would have you focus on the car loan first because you owe the smallest amount of money on it.

You'd settle it in about three months, then tackle the other two. As with the debt avalanche method, you'd become debt-free in about 11 months. Percentage of U. It's our hunger for instant gratification that makes the snowball method so effective, says personal finance author and talk-show host Dave Ramsey , an advocate of the technique. You need some quick wins in order to stay pumped enough to get out of debt completely.

The debt snowball method's big advantage is that it helps build motivation. Because you see fast results—eliminating some outstanding balances completely in only a few months—it encourages you to stick with the plan. That mountain of debt doesn't seem so unscalable after all. Plus, it's easy to implement—no need to compare interest rates or APRs; just look at each sum you owe.

The big drawback of the debt snowball is that it can be more expensive overall. Because you're prioritizing balances over APRs, you could end up paying more money in interest. Getting completely free and clear could take more time, too, depending on the nature of the debts, and how frequently the interest on them compounds.

Both the snowball method and the avalanche method are types of accelerated debt repayment plans —ways of speeding up the retirement of your debts, by paying more than the minimum due on them each month. Of course, both assume you can afford to commit extra funds to pay down what you owe on a regular basis. If your income is irregular or unstable—or if you think a layoff is imminent—you might want to stick with making minimum payments.

If you're applying one of these strategies to credit card balances, they should be credit cards you don't plan to use for new purchases. You can't pay off a balance, obviously, if you're continuously adding to it. Finally, there may be special circumstances with certain debts that alter your repayment schedule. Whatever debt repayment method you're using, however, you'd definitely want to clear this balance before the special introductory rate period ends—regardless of how it compares to your other bills.

Otherwise, you'll just have added a fresh pile to your interest-rate-bearing obligations. The debt snowball is a type of accelerated debt repayment plan. You list all of your debts from smallest to largest.

You then devote extra money each month to paying off the smallest debt first; you make only minimum monthly payments on the others. When the first balance is settled, you move on to the next smallest. The debt snowball can be an effective method for settling just about any type of debt, with the exception of mortgage loans. A lot of its appeal is psychological. It has the debtor target small balances to pay off first; erasing these "easier" outstanding balances gives a motivational boost, encouraging the debtor to stay disciplined and keep on with their debt repayments—the way the quick loss of a few pounds encourages a dieter to stay with a weight-loss program.

Whether a debt snowball or a debt avalanche is better depends on whether we're speaking in financial or psychological terms. In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest rates—targeting the most expensive ones first—it means you end up paying less in interest.

That adds up to paying less money overall—provided you stick with the payment plan. But, as any behavioral finance expert will tell you, human beings are often irrational when it comes to money. They find it much easier to stay motivated when they pay off smaller debts first, regardless of their interest rates.

So, even though it might cost more, the debt snowball is better, psychologically speaking—debtors are more likely to stick with the program because they have a stronger sense of making progress. Whether you should pay off big debt or small debt first depends on your psychological makeup. Studies have shown that paying off small debts often leaves people feeling more satisfied—small victories, so to speak—and more likely to keep on with a repayment program that eventually clears all their outstanding balances.

Certainly, you get quicker results paying off the small debt, and it simplifies life, to have fewer bills coming in each month. On the other hand, paying off big debt is more cost-efficient in the long run. The larger your outstanding balance, the more interest it's generating; in fact, a big percentage of your monthly minimum payment is probably going just towards the interest.

So, by settling the big debt, you will save on interest, and you will free up funds for other bills and other purposes. Paying off debt has its advantages—especially if you're incurring a high-interest rate on it. With a lot of consumer debt like credit cards , as much as half of the monthly minimum payments go towards interest. Those interest payments are just money thrown away. A lot of debt will also ding your credit score, making it hard to get financing at good rates if you want to buy a home or other big-ticket item.

And finally, paying off debt will free up funds for other things—like savings or investments. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials. Compensation may factor into how and where products appear on our platform and in what order.

But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates. Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can. This method focuses on paying down your smallest debt balance before moving onto larger ones.

The snowball method is all about building momentum as you pay off debt. It may be a good solution to better manage your finances over time. The debt snowball method was originally made popular by personal finance expert Dave Ramsey.

While the debt snowball method offers a number of advantages, it does come with one big drawback. Because the method focuses on the largest debts rather than the highest-interest debts, you could wind up paying more in interest charges over time.

In other words, in exchange for the momentum you gain, you could be paying even more money to borrow money. For instance, a 2. However, the snowball method emphasizes eliminating the smallest debt first 2. Yes, the debt snowball method rewards you for continually slicing your debts. But what if you want to fast-track the method? Here are five tips:. If you think small victories will provide you with the motivation you need to pay off your debt, the debt snowball method could be just the ticket for eliminating your debt.

Because it provides early and visible progress—thus reinforcing your overall belief that eliminating your debt is possible—the debt snowball method works well for many people. However, if you have significant amounts of debt that carry a higher APR, you may want to compare the debt snowball to the debt avalanche, or to other debt relief methods, before you proceed. John Egan is a freelance writer, editor and content marketing strategist in Austin, Texas.

His work has been published by Experian, CreditCards. John earned a bachelor's degree in journalism from the University of Kansas and a master's degree in communication from Southern New Hampshire University.

He has more than a decade of experience as personal finance editor, writer and content strategist. Select Region. United States. United Kingdom. John Egan, Mitch Strohm.

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