What Is the Debt Snowball Payment Strategy?

Stay motivated while paying off balances

hands wearing mittens holding large snowball
••• Image Source/Getty Images

If you feel overwhelmed by debt, a debt snowball strategy can help you regain a sense of control while paying off credit cards and loans. The approach builds momentum as you pay off debts, like a snowball rolling down a hill. 

Other strategies, like the debt avalanche, also work well and can result in lower interest costs, but the debt snowball strategy helps some people stay motivated better. 

How the Debt Snowball Method Works

With the debt snowball method, you pay off your smallest debt first and move on to the next-smallest debt, and then the next-smallest, and so on. During the process, you continue making the required minimum payments on all of your loans, with any extra money each month going toward your targeted debt. 

By starting small, you get quick wins and a sense of accomplishment, which may help you stay motivated.

Here are the steps you need to take.

  1. Get organized: Make a list of all of your debts. Put with the smallest balance you owe at the top, with the next-smallest in the line below that, and then the third-smallest in the line below that, and so on. As you build your list, ignore the interest rates, monthly payment amounts, and other loan features. At the bottom of your list, put the largest debt. 
  2. Pay the minimums: If you don’t pay the minimum required on all of your loans and credit cards, you may have to pay fees and penalties, and it may damage your credit scores.
  3. Pay extra on your smallest balance: Put any extra money available each month toward the credit card or loan at the top of your list. Your goal is to aggressively pay off that balance.
  4. Build on your success: After paying off your smallest balance, cross it off the list and move on to the next-smallest balance. You no longer need to make minimum payments on the loan you just eliminated, so you should have even more money available every month for extra payments.

If you have an iPhone, iPad, or other iOS device, there are apps to help you eliminate your debt more quickly via the debt snowball method.

The Strategy in Action

Note: In addition to providing a series of relatively quick victories, the debt snowball allows you to pay off loans at an increasing speed over time.

Example 

Assume you have several loans outstanding. Your monthly budget shows that you have an additional $100 available each month for extra loan payments. Where should you put that money?

To answer that, first list each loan or credit card debt from the smallest loan balance to the largest.

Debt Snowball Example
Type Balance Rate Min. Payment
Personal loan $2,000 7% $39.60
Private student loan $13,000 5% $183.74
Credit card $16,000 17% $480.00
Auto loan $21,559 4.75% $404.38

With the debt snowball, your extra $100 per month goes to your personal loan first. As a result, you pay $139.60 (the required $39.60 plus the additional $100) to that lender each month.

Snowball effect: After you pay off each loan, that loan’s payment becomes available for additional debt payments. 

  1. After paying off your personal loan, you now have $139.60 extra for the next loan (because you don’t have to pay your personal loan lender anymore). 
  2. You send extra money each month to your student loan servicer. The payment will be the required $183.74 plus $139.60, for a total of $323.34.
  3. After paying off your student loan, you have an additional $507.08 available each month for paying off your credit card.
  4. The process continues to build momentum until you finally wipe out all of your debts.

See the example above and create your own repayment plan in our Google Sheets Debt Snowball Calculator.

Who Is the Debt Snowball Best For?

The debt snowball is an excellent debt elimination strategy, particularly for those who:

  • Benefit from positive reinforcement
  • Want help staying motivated
  • Don’t need to shave every penny off their interest expenses
  • Don’t have high-cost debts spiraling out of control

The Dave Ramsey Show popularized the debt snowball, promoting it as an ideal strategy for paying off non-mortgage debt.

The debt avalanche method prioritizes debts with the highest interest rate (instead of the smallest loan balance). It lowers your total interest costs and will make you debt-free faster, but may not give you those initial small wins to stay motivated.

When Is This NOT the Best Strategy?

The snowball method isn’t right for everyone. Here some circumstances in which you’d be better off taking a different approach: 

You Have Incentives to Not Pay Extra

In some cases, it might not make sense to accelerate your payments on certain debts. For example, if you’re pursuing Public Service Loan Forgiveness for federal student loans, the Department of Education might allow you to stop paying after 120 qualifying payments. If successful, the remainder of your debt will be forgiven, so there’s little benefit to paying extra on a loan that eventually gets wiped out. 

Instead of paying extra on those loans, it may be best to pay as little as possible under income-driven repayment and put extra money toward other high-interest-rate debts. 

In some cases, debt forgiveness can cause tax consequences. Federal student loans have unique features, so evaluate the pros and cons of accelerating those payments.

You Have an Extremely High Interest Rate on a Debt

On the other hand, it’s probably best to pay off toxic debts quickly, no matter how much you owe. Payday loans with effective APRs of several hundred percent can spiral out of control if you let them linger. Instead of blindly following the debt snowball formula, review the details of each loan.

You Want to Pay the Absolute Minimum in Interest

Because the debt avalanche method reduces your overall interest costs, it can wipe out your total debt faster than the debt snowball method. If you look strictly at the numbers, debt avalanche makes more sense. 

But it may require more patience. That’s because it may take you a while to clear a big, high-interest debt before you get to smaller lower-interest balances. For some people, staying motivated requires early positive reinforcement, and the debt snowball delivers that because you pay off your smallest loans relatively quickly.

The Bottom Line

If it’s easier for you to pay off loans and stay debt-free with the debt snowball method than with the debt avalanche or some other method, the added interest costs you’ll pay may be worth it. Your decision about which method is best lies in knowing yourself and what keeps you motivated. Whatever method gets you out of debt is the one that’s best for you.