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Debt Snowball Strategy: How Does it Work?

The debt snowball method is a debt repayment strategy that has you target your lowest balances first and manage your payments to accelerate your path to debt freedom.

While the debt snowball method is not the only way to more quickly pay off debt, it's a valuable approach if you're disciplined and follow the steps exactly.

What Is the Debt Snowball Method?

The debt snowball approach to paying off debt is primarily used for paying down high interest credit card debt, but it can be used to pay down any non-mortgage debt.

With this approach, you'll drop whatever monthly payments you're making down to the minimum amount due on all of your debts and move that extra freed-up cash to the credit card or loan with the lowest balance. Once that debt is paid off, you'll take the amount that you were paying toward it and apply it to the debt with the next lowest balance, and so on.

You'll continue this payment snowball process until you've eliminated the final credit card or loan balance included in your debt repayment plan.

If you have the budget, you may choose to add an extra payment on top of the debt snowball to really get the process rolling quickly.

How to Pay Off Debt Using the Snowball Strategy

To give you an idea of how the debt snowball method works, here's an example based on some sample debts. This is what you'd pay if you continued making minimum payments on your existing debts:

Debt Payoff Without the Debt Snowball Method
BalanceInterest RateMonthly PaymentPayoff TermTotal Interest
Student Loan$20,0008.5%$247.9710 years$9,756.57
Auto Loan$12,0005%$226.455 years$1,587.29
Personal Loan$15,00016%$527.363 years$3,984.80
Credit Card No. 1$10,00025%$308.334 years, 7 months$6,838.87
Credit Card No. 2$2,00014%$43.335 years, 7 months$888.74
Total$59,000$1,353.44$23,056.27

Now, let's say you employ the debt snowball method, tackling Credit Card No. 2 first, then Credit Card No. 1, and so on. Because you're snowballing each payment into the next debt, you don't actually need to pay anything more than what you're already paying to save time and money. Here's what the numbers look like if you don't add any extra payments.

Debt Snowball Method With No Extra Payments
Payoff TermTotal Interest
Student Loan4 years, 10 months$6,307.87
Auto Loan3 years, 11 months$1,483.11
Personal Loan3 years$3,984.80
Credit Card No. 13 years, 8 months$6,288.95
Credit Card No. 23 years, 2 months$690.70
Total$18,755.43

Using the debt snowball method alone with no extra payments, you'll be debt-free more than five years earlier, and save more than $4,300 on interest.

If you can manage to pay extra, you'll become debt-free even sooner and save a lot more on interest charges. Here's what it looks like if you pay an extra $150 per month toward your debts.

Debt Snowball Method and $150 in Extra Monthly Payments
Payoff TermTotal Interest
Student Loan4 years, 2 months$5,543.88
Auto Loan3 years, 3 months$1,338.87
Personal Loan3 years$3,984.80
Credit Card No. 12 years, 10 months$4,438.13
Credit Card No. 21 year$144.23
Total$15,449.91

As you can see, even if you can't manage to put any extra money toward your debt, using the snowball method will result in you paying off your debts more than five years sooner, and you'll save more than $4,300 in interest.

But if you can manage to put even a little extra money toward your payments each month, you'll become debt-free even faster and pay thousands less in interest.

Difference Between Debt Snowball and Debt Avalanche

Another way to pay off your debt is by using the debt avalanche method. This approach rearranges the order in which you pay off debt by focusing on the loans or credit cards with the highest interest rates instead of the lowest balances.

The idea is that by eliminating the debts with the highest interest rates first, you'll save more money on interest. The actual difference, however, may not be a lot.

Use the debt avalanche method if maximizing your savings is your top priority. But if you like the idea of getting rid of balances faster by focusing on the small ones first, use the debt snowball strategy.

When Is the Debt Snowball Method the Best Approach?

There's no one-size-fits-all solution to paying off your debt. Where one method may work for a friend or family member, another may be a better fit for you. Here are some scenarios where the debt snowball method may be the best strategy to use:

  • You want to close some credit cards. If you want to reduce your exposure to credit card debt and those balances are lower than other loans, the debt snowball method will help you pay them down faster. After that, you can close the account and keep yourself from racking up a balance again.
  • You're trying to reduce your debt-to-income ratio. Your debt-to-income ratio (DTI) is an important factor when applying for new credit, especially with mortgage loans. By eliminating loans with lower balances, you'll remove them from the DTI equation entirely, making it easier to get approved for an auto loan or mortgage if you need it.
  • You're having a hard time staying motivated. Paying off debt can be a monumental task, and it can be tough to stay on track if you go years without getting rid of any balances. By eliminating your lowest balances first, you'll start seeing progress sooner in the process, which can encourage you to stick to your plan.

Keep an Eye on Your Credit During 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.

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