A Guide to Using the Debt Snowball Method

Debt snowball is a debt repayment strategy that can help you to pay off debt, improve your credit score, and make you feel better about your finances. It’s one of the most effective debt payoff strategies and has helped millions of Americans to escape mounting credit card, student loan, and personal loan debt.

In this guide, we’ll look at the basics, presenting you with a debt snowball calculator and some essential information so you can use this method for yourself when paying off debt.

What is the Debt Snowball Method?

Debt snowball is a payoff strategy designed to boost your confidence, reduce your debts, and improve your credit report. The idea is simple: Continue meeting your current monthly payment obligations and put all extra money you have towards the smallest debt. Unlike the debt avalanche method, which focuses on the debt with the highest interest rate, the goal is to focus on the smallest debt, whether that be a car loan, credit card, or student loan.

There are some obvious flaws with this strategy, but there are also some surprising advantages, both of which we’ll discuss below.

How the Debt-Snowball Method Helps You Repay Your Loans

Payoff strategies like debt snowball work by increasing your interaction with your debt, encouraging you to increase your monthly payments, thus reducing the loan term and the total interest.

The reason debt escalates so quickly is that your monthly payment only covers a small percentage of your total balance and most of this is interest. If we use credit cards as an example, the average monthly payment is around 2%. With an APR of 18% on a balance of $10,000, you’re paying $1,800 a year or $150 a month. This means your first month’s balance is $10,150, which in turn means that your monthly payment of around $200 (2%) reduces your balance by just $50. The same happens again the next month, with the interest now calculated against the remaining balance of $9,950.

Every additional payment you make once that 2% has been paid, reduces the principal/balance further. If you pay just $50 more in that first month, you’re repaying twice as much of the principal and next month’s balance will be $9,900. This strategy not only increases the rate at which you pay off the loan, but because the balance is much smaller, the interest payments are also smaller, which means you spend less.

Debt Snowball Calculator

You can use a debt snowball calculator to help you pay off debt, but you don’t need one. A debt snowball calculator will simply tell you how long it takes to clear your debt and which debt is the smallest, but the latter is easy to calculator yourself and the former may do more harm than good.

Simply gather information on all of your debts and then zero-in on the one with the smallest balance. You don’t need to worry about the interest rate or monthly payment—it’s all about the balance. As an example, your list of debts from smallest to largest may look like this:

Type of Debt

Interest 

Minimum Monthly Payment

Balance

Credit Card 1

20%

$50

$2,000

Credit Card 2

20%

$200

$10,000

Credit Card 3

16%

$240

$12,000

Car Loan

5%

$400

$20,000

In this example, the first $2,000 debt won’t take very long to clear. And once it does, you have one less debt to worry about; one less monthly payment to make. You can then focus on the next smallest debt and keep repaying them until you’re 100% debt-free.

Keeping Accounts Open

The goal is this strategy is to clear accounts, improve your FICO Score and ensure you remain on-course for complete financial freedom. It’s tempting, therefore, to close accounts as soon as they clear and place a big green tick next to them in your mind. However, doing this could seriously reduce your credit score and undo all your hard work, at least in the short-term.

This is all down to something known as credit utilization, which accounts for close to a third of your FICO Score calculation. Lenders want to know that you’re not credit-hungry and won’t use every cent of credit that’s offered to you. It displays a level of irresponsibility and a lack of control and it’s a major concern. To account for this, the credit utilization aspect of your score compares all your available credit (such as the credit limit on a credit card) to all your used credit (such as the debt on that card). The higher the percentage of used credit is, the more of a negative impact it will have on your total score.

Every time you clear an account, you reduce this ratio by decreasing your debt, but if you then close that account, you’re also reducing your credit.

How to Get the Money You Need

Debt snowball is designed to be simple and easy to implement, but it also relies on you finding additional cash every month to increase your minimum payments. No extra cash means you won’t pay off debt early and this strategy will be a bust.

So, how can you hope to find this extra money?

  • Sell What You Don’t Need: Most American households accumulate huge amounts of junk over time, from old tech and furniture to clothes, media, ornaments, and more. If it’s gathering dust and doesn’t have a sentimental or collectible value, you don’t need it and can sell it.
  • Budget: The average household wastes thousands of dollars a year on food (40% of the average grocery shop ends up in the garbage) lottery tickets, cigarettes, and other luxury expenses. If you want to save your way to an easier life then you need to budget.
  • Ask for a Raise/Promotion: You won’t get it if you don’t ask. If you’ve been at your place of employment for a long time and believe you deserve it, then put your case forward and see how it goes.
  • Get a Part-Time Job: Have a few extra hours on an evening or a weekend? Look for part-time work that won’t be too taxing and will still allow you to relax and enjoy life. Every cent you earn takes you one step closer to clearing your debts.
  • Become Part of the Gig Economy: Freelancing has created endless opportunities for writers, designers, artists, coders, and anyone with some time on their hands and a little skill. Check freelancing portals and put those skills to good use generating extra cash.
  • Cash in Savings and Investments: It’s important to have a rainy-day fund, but there’s no point clinging onto it if you’re standing in the middle of a downpour. The same goes for investments earning a few bucks a year. You’ll spend more on interest payments than you’ll ever make through dividends and savings.

Debt Snowball vs Debt Stacking

There are several strategies for paying off debt, but the most common are debt snowball and debt avalanche, also known as debt stacking. The debt avalanche method focuses on the debt with the highest interest rate and then works its way down. The principal is the same as the debt snowball method in that you keep meeting your minimum payments and use all extra money to focus on a single debt, but the debt you focus on changes.

You can read our guide to Debt Snowball vs Debt Avalanche to learn more about how these two compare. We also have a complete guide to the Debt Avalanche Method.

When is Debt Snowball the Best Option?

The debt snowball method works well when you have multiple debts of similar interest rates and monthly payments. It also works very well if your costliest debts (in terms of interest) have the smallest balances. 

But it’s not all about the size of your debt as this strategy is also very good at boosting your confidence and motivating you. People get stuck in a cycle of debt because they focus on the short-term instead of the long-term. They don’t think, “This $10,000 balance will cost me over $5,000 in total interest” they just think, “This $10,000 debt is only costing me $200 a month.”

If you find yourself rooted in this mindset, then debt snowball might be right for you because it focuses on a long-term goal while also providing you with short-time success. You will see the results happen right in front of your eyes and this could spur you on to continue. This is important, because without that motivation boost and without those visible results, you may start using your additional income to spend on luxuries and not to clear your debts.

When is Debt Snowball the Worst Option?

As discussed under out Debt Snowball Calculator section above, this strategy can ignore high-interest debts in favor of debt with small balances. If your debt is mainly credit card or loan based, this shouldn’t be a major problem. However, if you have a credit card with a massive balance and interest rate, as well as a few small loans and installment plans, it could be.

In this case, you’re allowing your credit card balance to go unchecked while you focus on small interest loans. You will still pay off debt in the long-run, but it will cost you much more than if you were to focus on that credit card debt in the first place.

If your minimum payments are at their biggest with debts that won’t be touched for months or years, maybe it’s not the right strategy for you.

Summary: Is the Debt Snowball Strategy Right For you?

The problem with debt is that we tend to focus on the smaller picture. If we have debts of $30,000 costing $500 a month and generating over $20,000 in total interest, logic dictates that a sudden windfall of $30,000 should be used to clear those debts. It would save $500 a month and $20,000 over the term.

However, the vast majority of debtors would sooner put that money towards a car, home or vacation, seeing the cost of the debt as $500 a month and not $20,000 over several years.

The debt snowball method may not make much financial sense over the long-term, but the same can be said for loans, interest, debt consolidation and everything else that we willingly subject ourselves to. The point is that it creates small, achievable milestones; it makes the impossible possible, and that’s why it still serves a purpose when compared to the avalanche strategy.