How does the "snowball" method of paying off credit card debt work? In what ways is it superior over other ways of reducing one's debt?

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    One caveat for all the answers. Some credit card balances may have amounts that are charged different rates of interest (e.g. "interest-free" transfer balances vs other charges). If so, the CARD Act allows minimum payments to be applied to the debt with lowest interest, but amounts paid in excess of the minimum payment must be applied to the highest-interest balances. So, paying minimum amounts on all credit cards except one may reduce the lowest-interest balance on those other cards instead of the highest-interest balance. – Dilip Sarwate Apr 25 '12 at 15:18
up vote 31 down vote accepted

The most popular method of doing a debt snowball is to to pay your debts in order from smallest to largest, regardless of their interest rate. The idea behind this is that you get a boost from seeing progress, and stick with it. It's popular for a reason -- it's very effective.

However sometimes people just can't stand the thought of paying extra interest. If you're very highly motivated and able to stick with something long term despite seeing only a small amount of visible progress at a time, you can do the debt snowball from highest interest rate to lowest interest rate. It seems that people tend to stick with the first method more though, and oftentimes the difference in interest rate is not really that great. (Especially if you hit the debts hard.)

In either case, it works like this:

  1. You organize your debts in the desired order.
  2. You pay minimum payments on all debts.
  3. You pay as much extra as possible each month to the first debt in the list until it is gone.
  4. Once the first debt is paid off, you add the amount you had been paying to that debt to the next debt in the list, and throw as much money at that debt as possible.
  5. Repeat the process until all debts are repaid.

You can organize your debts yourself, or you can use tools like the What's the Cost snowball calculator, the Pay Off Debt app, or Dave Ramsey's Total Money Makeover (book, apps, system).

Disclaimer: Answer author runs the company that publishes the Pay Off Debt app.

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    What are these things - are they apps or something - What's the Cost, Pay Off Debt – pal4life Oct 25 '16 at 5:04
  • paying off debts is mostly psychological, not mathematical. That's why this method works. It forces you to do what works. – rocketman Jan 12 at 17:24

The snowball is an approach to paying off debt that is based on the psychological aspects of paying off debt.

In a debt snowball you order all of your debts smallest to largest. Make sure you are making all of your minimum payments then all additional income you have gets thrown at the smallest debt regardless of the interest rates. Once you have that debt paid off you take the payments that you were paying to that debt and start applying it to the next smallest. This continues with every debt and by the time you get to the last one it goes very quickly since all the money from your previous payments is now going on the last big debt.

There are two big benefits to the debt snowball.

  1. It gives positive psychological reinforcement that you are making progress on your goals. This can help encourage someone to continue the process of getting out of debt.
  2. If financial hardship strikes in the middle of the process you will likely have eliminated some of your minimum payments and you will have less required for your outgoing payments each month.

The elephant in the room about the debt snowball is that it isn't the fastest way to pay off debt mathematically for people that can truly commit themselves to paying off their debt. If raw debt removal speed is your goal and you have extremely firm commitment to the cause then paying off your debts with the highest interest rate first is the fastest way. You just have to be very cautious with this because if your highest interest rate is also on one of your biggest debts it can very easily feel like you're making no progress towards your goal.

Good luck in getting out of debt. It's an amazing feeling when you finally hit that goal.

I wrote an article Thinking About Dave Ramsey, as he seems to be the author of the phrase and concept of Debt Snowball. My issue is not with the Snowball, per se, but with Dave's rigid adherence to its sacredness; “Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly. Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.”

The truth is that there's a price to pay. And that price can be calculated. If (a) the lowest balance has the highest rate or (b) the range from lowest to highest rate is minimal, say a few percent, the difference between "low balance" and "high rate" approaches will be minimal. In the article I linked, there's an example of a 24% credit card as well as a number of sub 10% loans. The punchline is that the snowball method costs more than the preferred "high rate" method, by over $4000. Speaking against the Debt Snowball isn't popular. All I suggest is to get the spreadsheet, put in your own numbers and make your own decision.

The snowball method counts on the "psychological boost" of knocking off the small accounts first. I understand that. If instead, one looked at the total balance owed across cards and interest accruing each month, paying the high rate will look better on that sheet. $1000 to a 24% card saves you $20/mo until it's paid in full. But $1000 to the 6% loan, only knocks off $5/mo in interest cost.

If you'd like a rough estimation of how it works, you can try this free online snowball tool at http://www.whatsthecost.com/snowball.aspx. It will make a little report to kind of visually/numerically show you how it works.

It won't force you to make an account, but if you'd like to maintain the sample you put in later, you can make an account and use it to track your progress. I will admit the app is a little slow, but it's nice to be able to track that in the cloud and also have the option of printing it out (.csv exporting) with excel.

No matter what strategy you follow (the psychological one where you pay of the smallest debt first, or the financially better one where you pay the debt with the highest interest rate first), you can pick one debt that you concentrate on getting rid off, and get rid of it.

And then apply a bit of common sense. If you owe $1000 at 18% and $10,000 at 20%, it's fine to pay back the $1000 first and get the psychological benefit of success and feeling of achievement that enables you to attack the bigger goal next - succeeding in paying back the $1000 is ten times better than trying the $10,000 and failing. If it's $4,500 vs. $5,000 you go for the one with the bigger interest rate. And if it's $1000 at 6% vs. $10,000 at 20%, you are really better off going for the high interest rate first.

The two main ways to pay off debt are the snowball and avalanche methods.

Snowball

The snowball method involves paying off your smallest debts first. For example, say you have 3 credit cards with the following balances:

Card 1: $300

Card 2: $750

Card 3: $1,000

You would organize them in that order, from smallest to greatest amount. You'd pay as much as you can towards card 1 and make the minimum payments on cards 2 and 3 until you have card 1 paid off.

Once card 1 is paid off, instead of pocketing that money, put it towards paying off Card 2, and continue paying only the minimum on card 3.

Continue this "snowballing" of money until card 3 is completely paid off. Think of it as snowballing your payments, and they'll get larger and larger because the more debt you pay off, the more money you'll have to put towards your larger debts.

The snowball method is helpful for those who like instant gratification. If seeing those smaller balances at zero makes you feel more accomplished than getting rid of higher interest (see next method), then the snowball method is for you.

Avalanche

The avalanche method focuses on paying off debts with the highest interest rates first.

Let's use the example from above, only now include interest rates:

Card 1: $300 14%

Card 2: $750 18%

Card 3: $1,000 16%

If you use the avalanche method, you'll pay down Card 2, then Card 3, then Card 1. You'd put as much money as you can to pay off card 2 while making minimum payments on cards 1 and 3 until 2 is paid off, then move to card 3, then 1.

This method is useful for those who are a bit more patient. The payoff won't be as obvious, since you're probably starting with one of your higher debts, but it will save you tons of money on interest in the long run.

  • -1 Redundant to the others. – RonJohn Jan 12 at 17:15
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    Well, it does have the novelty of the term avalanche. LOL. – Nathan L Jan 12 at 17:29

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