How to Use Debt Snowball to Pay Off Debt

 

With the debt snowball method, you reward yourself for wins along your debt payoff journey. You pay your smallest debts in full first, then roll the amount used to pay your first debts into paying off your bigger ones — much like rolling a snowball down a hill.

Small victories upfront — the satisfaction of seeing debts eliminated one by one — keep you engaged. It’s very different from the debt avalanche strategy, which prioritizes high-interest debt to save money but may take longer to get the first debt wiped out.

Using the debt snowball method

First, be sure that you’ve budgeted enough to cover the minimum monthly payment for every debt. Now, arrange the debts by balance, from smallest to largest. Disregard the interest rate on each.

Every month, put the extra money you budgeted for getting rid of debt toward your smallest debt — even if you are paying more interest on a different one. Once the smallest debt is repaid, take the entire amount you were paying toward it (monthly minimum plus your extra money) and target the next-smallest debt. Keep knocking off debts and then diverting all the freed-up money toward the next debt in line.

Here’s how it could look in real life: If you have a hospital bill for $1,200 that the hospital is allowing you to pay interest-free, and two credit card bills for $5,000 (at 22.9% interest) and $3,000 (at 15.9%), you’d pay the hospital bill first. That’s right — you’d pay the interest-free loan before you paid those that accrue interest.

This can make numbers people crazy, because it usually saves time and money to pay highest-interest debts first. The debt avalanche method is a better fit for them. But if you need to front-load your payoff plan with early victories in order to stick with it, snowball is for you.

If you choose the snowball strategy and your high-interest debts are also the largest, don’t ignore opportunities to find lower rates, especially if your credit score is climbing. You may be able to transfer a credit card balance to a lower-rate card or find a debt consolidation loan.