Debt Snowball Method: Pros and Cons

What is the debt snowball method?

The debt snowball method involves paying off your debt from the smallest balance to the largest balance until you become debt-free. The core idea behind the method is to create quick wins that motivate you to keep paying off debt.

“The debt snowball method prioritizes balances to pay off the smallest debt first,” said Christopher Stroup, founder of Silicon Beach Financial. “This has the advantage of building motivation by settling debts faster, allowing you to move on to bigger debts next.”

How to use the debt snowball method

To use the debt snowball method, take the following steps:

1. Make a list of your debts

Make a list of all of your debts, and then organize them by the smallest balance to the largest balance.

2. Start making payments

Make the largest payments possible on your smallest debt, while still making the minimum payments on your other debts. Then, put any extra money toward paying off your smallest debt first.

3. Repeat with next smallest debt

Once your smallest debt is paid off, start making the largest payments possible on your next smallest debt, while still making the minimum payments on your other debts. Repeat this process until you’re debt-free.

Debt snowball payoff example

Let’s say you have the following accounts to pay off:

• Personal loan: $1,000 with an 11% annual percentage rate (APR)
• Credit card: $3,000 at 27% APR
• Auto loan: $6,000 at 12% APR
• Student loans: $15,000 at 5% APR

Under the debt snowball method, you’ll focus on paying off your personal loan debt first since it has the smallest balance. If you can afford to put about $500 toward your debt each month, you’ll pay off your personal loan in about two months. You’ll then continue to make the minimum monthly payments on your other debts.

Once you pay off your personal loan, you’ll focus on paying off your credit card debt, then your auto loan debt and then your student loan debt. At that point, since you’ve eliminated your other debts, you’ll have more money to allocate toward repaying your student loan debt, allowing you to repay it faster.

» MORE: Ways to pay off debt

Advantages of the debt snowball method

The benefits of the debt snowball method are mostly psychological. While it ends up costing more in interest in the long term, some borrowers are more motivated by seeing their debts quickly disappear.

This method’s main benefit is providing quick wins, which can provide motivation to keep going.

Here are some of the main advantages to using this method:

• It provides quick wins. Fully paying off a source of debt, even if it’s your smallest debt, may provide the motivation and stress relief needed to keep going.
• It reduces your total number of debts. While the debt snowball method may not shrink your cumulative debt amount quickly, it will reduce your total number of outstanding debts much faster.
• It’s easy to set up. Simply rank your debts in order of outstanding balances. Then, set up automatic minimum payments for all but the smallest one and put extra money toward paying off the smallest debt first.

Disadvantages of the debt snowball method

The drawbacks of the debt snowball method are mostly mathematical, which is one of the reasons why many economists and financial experts tend to prefer the debt avalanche method.

This method’s main drawback is that you’ll likely pay more in interest charges over time.

Here are some of the disadvantages to the debt snowball method:

• You could end up paying more interest. Unless your smallest debt is also the one with the highest APR, you’ll be temporarily deprioritizing your debt with the highest interest rate, which will result in paying more total interest over time.
• Becoming debt-free could take longer. Ignoring debts with the highest interest rates could cause your total amount owed to balloon, which will take longer to pay off.
• It might actually demotivate you. If quick wins aren’t motivating enough since you only see your overall debt growing, the debt snowball method may not be a good fit.
• Your credit might get dinged. Fully paying off loans can temporarily lower your credit score by a few points since you’ll reduce your credit mix, which is a factor of your credit score. But continuing to make regular, on-time payments will improve your score over time.

Alternatives to the debt snowball method

If the debt snowball method isn’t right for you, you may want to consider another debt payoff method.

Debt avalanche method

The debt avalanche method involves paying off the debt with the highest interest rate first, followed by the second highest interest rate, and so on, until you reach the debt with the lowest interest rate. While it may not result in quick wins, the debt avalanche method can help you become debt-free faster while minimizing your total interest paid.

Balance transfer

If you have credit card debt on a high-interest card, consider transferring your balance to a balance transfer credit card with a 0% intro APR. With this type of card, you can get up to 21 months to pay off your debt without paying interest. Note that this method has balance transfer fees, which typically range from 3% to 5% of the transferred balance.

Debt consolidation loan

A debt consolidation loan can help you combine all of your loans into one loan with one monthly payment, making the debt more manageable. You may also be able to qualify for a lower interest rate, saving you money.

Debt management plan

If you sign up for a credit counseling service, you could enroll in a debt management plan (DMP). With a DMP, your credit counselor will help you create a payoff strategy and may even negotiate lower interest rates and reduced fees with your creditors.

» MORE: Debt snowball vs. debt avalanche

FAQ

Bottom line

The debt snowball method involves paying off your smallest debt first, followed by the next smallest debt, and so on. While it may cost you more time and interest in the long run, knocking out debts in order of size may provide the motivation and stress relief you need to keep repaying your debts until you’re debt-free.