The Debt Snowball Method: What Is It and How Does It Work?

Are you looking for a way to become debt-free? You might think that you need a financial advisor to make a plan, but there are some simple strategies that you can use to create a successful debt repayment plan. One of the more common strategies is called the debt snowball method. This debt-reduction strategy helps you pay off your debts by tackling the smallest balances first and building momentum toward larger ones. Anyone can create a repayment plan using this method, but the question is: Is the snowball method the right strategy for you?

Debt Snowball Method

The debt snowball method is a way of planning how to pay off your debts on your own. The method works with most types of consumer debt, including personal loans, car/auto loans, student loans, credit card debts, and medical bills.

However, this method may not be right for all types of debt. For example, it shouldn't be attempted with mortgage repayments. It might not make sense to use if you have federal student loans either. For those, you may want to take advantage of an income-driven repayment plan or another student loan forgiveness plan. You can still use the debt snowball method for your remaining debt.

How the Debt Snowball Plan Works

The debt snowball method is very easy to set up. All it requires is that you prioritize paying off your smallest debt regardless of the interest rate. Once you pay off your smallest debt, then you move on to the next smallest debt. Here are some more detailed instructions:

Make a list.

The first step in the snowball method is to make a list of all of your debts in ascending order from the lowest balance to the highest balance. This should not include your mortgage. If you happen to have two debts with balances that are very close, the debt with the higher interest rate should be moved up in the list so that it gets paid off first. Below is an example of how to organize debt by total balance owed in ascending order: 

Example 1: Laura Smith’s Debt Snowball Method – Listing Debts

Laura Smith’s debts include: 

• Car loan: $5,000 balance, 4.25% interest rate

• Credit card: $10,223 balance, 12.35% interest rate

• Personal loan: $6,000 balance, 6.5% interest rate

• Medical debt: $2,982 balance, 4% interest rate

Laura Smith’s debts in placed ascending (lowest to highest) order: 

1. Medical debt: $2,982 balance, 4% interest rate

2. Car loan: $5,000 balance, 4.25% interest rate

3. Personal loan: $6,000 balance, 6.5% interest rate

4. Credit card: $10,223 balance, 12.35% interest rate

If Laura Smith has decided to use the snowball method, then the first debt she will pay off is her medical debt because it has the lowest balance. This is the case regardless of the interest rates or minimum payments due on her other debts.

Make minimum payments. 

Next, make sure you know what the minimum monthly payments are on all your debts. Once you know what your minimum payments are, add up the minimum monthly payment amounts for all debts other than the debt with the smallest balance.

Example 2: Laura Smith’s Snowball Method – Determining Monthly Payments

In our example, while Laura is paying off the first debt on the list (her medical debt), she’ll have to keep up with the minimum payments on the rest of her debt. Although making minimum payments will not get her much closer to paying off her other debts, making minimum payments will still keep the total balances from going up and will help protect her credit score.

Laura Smith’s Minimum Payment Amounts: 

• Car Loan Minimum Payment: $80

• Personal Loan Minimum Payment: $110

• Credit Card Minimum Payment: $300

Laura will pay $490 every month in minimum payments on her other three debts. This means that she’ll have $510 left over after making all of her minimum payments.

Pay extra on the smallest debt.

Once you’ve calculated how much money will go toward minimum payments, put any leftover funds toward the debt with the lowest current balance. This amount should be more than the minimum monthly payment amount.

Example 3: Laura Smith’s Snowball Method – Paying the Smallest Debt

Remember that in Laura Smith’s case, she was able to budget $1,000 a month for her debt. She used $490 to make minimum payments on the three debts she’s not focusing on, which left her with $510. This means that she'll be able to make payments of $510 on her medical debt every month.

For the snowball method to work, it’s important for you to contact lenders and inform them that you want your extra payments to be applied to the principal. By paying the principal first, you’ll reduce how much interest accumulates every month since the interest will be based on a smaller principal amount.

Pay the loan off and cross it off the list.

After the first loan is zeroed out, you can repeat the strategy by moving on to the next smallest debt.

Example 4: Laura Smith’s Snowball Method – Next Smallest Debt

If Laura keeps paying $510 every month on her medical debt, she will pay that debt off in about six months. This short time will encourage Laura to continue paying debts off one by one. In her case, the next debt she’ll begin paying off is her car loan. 

She’ll continue to pay the $410 in minimum payments on her personal loan and her credit card debt. If she still has $1,000 budgeted for paying off debt, then she can pay $590 a month on her car loan. Let’s say that after six months of making minimum payments, she has $4,600 left to pay. If she then begins paying $590 every month, then she’ll finish paying her car loan off in about nine months.

Pros and Cons of the Debt Snowball Method

There are advantages and disadvantages to using the snowball method. How do you know whether it’s the right method for you? You’ll have to look at your financial situation, including how much money you can set aside to pay off debt, how high your interest rates are, and how many different debts you have.

Advantages of the Debt Snowball Method

Paying off smaller debts quickly is much more encouraging than working on the same debt for a year or more. Because the snowball method creates a mental boost, it helps you stay the course and continue working to eliminate larger debts.

The debt snowball is also simple and easy to execute. Unlike some other debt repayment methods, it doesn't require much financial knowledge. Because most people aren’t financial planners, this makes it an attractive method for most people in debt. 

Overall, the debt snowball method works best for debt reduction when you don’t have too many high-interest debts with big balances and if you have enough money to make extra payments on the debt you’re focused on paying off.

Disadvantages of the Debt Snowball Method

The biggest disadvantage of the debt snowball method is that it doesn’t account for interest rates. If you have a large loan with a high interest rate and pay only the minimum while you pay off smaller debts, you’ll pay much more interest over time. Depending on the situation, this may not be worth it for you. 

Further, even if your larger debts don’t have outrageous interest rates, their large balances will still increase how much you pay overall because of compounding interest. Paying these large loans last would not only mean making bigger and more interest payments, but it will also extend the repayment periods for those larger loans.

Lastly, this type of plan doesn’t work well if you don’t have enough money to make extra payments on the loan you’re trying to pay off. If the total amount of money you can allocate to paying off debt is only enough to make minimum monthly payments on all of your debts, then the snowball method likely won’t be the right strategy for you.

Debt Avalanche Method vs. Debt Snowball Plan 

If you determine that the snowball method is not the best way to pay off your debt, you could try the avalanche method. Using this method, you’ll pay off your debts with the highest interest rates first, regardless of their balance. It’s similar to the snowball method in that you’ll want to make minimum payments on your debts with lower interest rates while you focus most of your money on the debt with the highest interest rate. 

Example 5: Laura Smith’s Debt Avalanche Method – Listing Debts

If Laura were to use the avalanche method to pay off her debts, she would pay off her debts in the following order: 

1. Credit card: $10,223 balance, 12.35% interest rate

2. Personal loan: $6,000 balance, 6.5% interest rate

3. Car loan: $5,000 balance, 4.25% interest rate

4. Medical debt: $2,982 balance, 4% interest rate

In this case, Laura would make minimum payments on her personal loan, car loan, and medical debt. Then, she would allocate whatever leftover money she has to her credit card debt. Just like the snowball method, the payments on the debt you’re trying to pay off first (in this case, the credit card) must be more than the minimum monthly payment. Otherwise, this approach won’t help you become debt-free.

Differences in Priorities 

The debt avalanche method and the snowball method prioritize different things. The snowball method prioritizes reducing the number of debts you have as soon as possible, and the avalanche method prioritizes reducing interest charges and how much you’ll pay over time.

Overall Costs

The avalanche strategy is more appealing for some debtors because they’re more likely to pay less money overall. This is because they’ll pay less in interest since they’re paying off all the high-interest debt first. Those who prefer the avalanche method generally want to pay less interest. Those who prefer the snowball method tend to want to prioritize paying off small debts because each debt payoff is a quick win that can keep them motivated. It’s also one less payment to keep track of every month. 

There are additional strategies to reduce your debt. For example, you may try debt consolidation, where all or some of your debts are refinanced into a single loan with a single interest rate. Or, you might consider filing for bankruptcy. However, some debt relief strategies have more negative consequences than others. If you have questions about how to best reduce your debt, speak with an attorney to discuss your options.

Let’s Summarize...

If you’re overwhelmed with credit card bills or struggling to manage other aspects of your personal finances, there are strategies you can use to create a payoff plan that works for you. One of the more approachable strategies is the debt snowball method, which will help you decide which debt to tackle first. 

While this method is easy to use, it may not be the right choice for you. If you need help making decisions about how to repay your debts, don’t be afraid to reach out to an attorney or a debt counselor. And, if you decide to file for bankruptcy, you can get a free evaluation using Upsolve’s free bankruptcy tool.