Using the debt snowball method to pay off debt

A debt repayment plan for people who get overwhelmed by debt repayment plans.

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The debt snowball method, invented by personal finance expert Dave Ramsey, is a plan to help you stay motivated while you pay down your debts — but not all experts agree that it’s the best idea.

What is the snowball method?

The debt snowball method is a debt reduction strategy based on the idea that you should pay your smallest debts first and then work your way up to the bigger debts. For it to work, you need to be able to afford the minimum monthly payment for all of your debts, plus extra to pay down one at a time as quickly as possible.

Once you’ve paid off your first debt, you should use that extra money to pay off the next smallest and so on and so forth. Each time you pay off one debt, it “snowballs” and leaves you with more money to spend on the next. Paying off your smallest debts first can have a motivating psychological advantage as you continue on the path toward a debt-free life.

How does it work?

Let’s say you have $5,000 worth of debt spread out over four credit cards:

  • Card 1. $2,000
  • Card 2. $1,500
  • Card 3. $1,250
  • Card 4. $250

You start by paying a minimum monthly payment of $35 on each card, plus an extra $60 a month on Card 4. At $95 a month, Card 4 will be paid off pretty quickly — then you can add the money that had been going to Card 4 to your monthly payment for Card 3.

You continue paying the minimum payments on Card 1 and Card 2 until Card 3 is paid off, and then you focus on Card 2. By the time you get to Card 1, you’ll be paying $200 a month on that one card and can quickly pay it down with no other debts to focus on.

Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. You might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

Is the debt snowball method right for me?

The snowball debt method is one of the easiest payment plans for people with multiple debts, and it’s especially useful for people who have trouble staying on top of their debts or making more than the minimum payments. Even just $10 more than the minimum can add up once you fully pay off your first debt.

However, it’s not the cheapest option. Some have criticized the method for encouraging people to pay off small debts first, leaving interest to accrue on larger debts. Other common methods include paying off the debt with the highest interest rate first, known as the debt avalanche, or paying off the biggest debt first. These methods may save you money in the long run, but ultimately you’ll want to choose the plan that you know you can stick to.

Bottom line

If you need a plan that can get you out of debt while keeping you motivated along the way, the debt snowball method may be for you. You can use our debt snowball calculator to help you figure out what debts to pay off first to get the snowball rolling.

But if you’re feeling overwhelmed by your debt, want to save money on interest or are simply looking to consolidate your debt into one monthly payment, you should explore other options.

Frequently asked questions

Images: Shutterstock

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