Paying off debt can feel overwhelming. Especially if you’re not sure where to start. That’s where a debt management plan like the debt snowball method can help.
Below, we’ll cover an overview of the debt snowball method, how it works, how it’s beneficial, and an alternative.
What is the Debt Snowball Method?
Did you ever make a snowman when you were a kid?
The easiest way to do it is by forming a small snowball and then rolling it around in the snow until it grows large enough to be the base of your snowman. As you roll it around, it gains momentum and speed, making it easier to grow.
You can apply the same principles to repaying debt too. You pay off the smallest debt first to gain momentum so that paying off your biggest loans is easier.
How Does the Debt Snowball Method Work?
Financial advisor Dave Ramsey popularized the debt snowball method and includes it as baby step 2 of his 7 baby step money management plan.
Using the debt snowball method looks like this:
- Create a list of all of your non-mortgage debts from smallest to largest
- Make minimum payments on all of the debt
- Put as much extra money as you can on the smallest debt until it’s paid in full
- Move onto the next smallest debt until all of your debt is paid in full
List non-mortgage debts from smallest to largest
Debts you should put on the list include medical debt, credit card debt, individual student loans, personal loans, car loans, and other non-mortgage loans. List them from smallest to largest balance—don’t worry about interest rates. The smallest debt is the one you’re paying off first.
Don’t bundle your student loans together on your list. Unless you’ve consolidated your federal student loans or refinanced your private student loans, you probably have multiple individual student loans from each year of college. Each one has its own loan balance, so it should be placed on its own line.
If you aren’t sure how much you owe or who you owe it to, request a free credit report from AnnualCreditReport.com. Your credit report will list your credit score and credit history, including your debt. Normally, it’s only free to receive a copy of your credit report once per year, but now, you can request it once per week for free through April 2021.
While it’s handy, check your credit report for errors too. Errors on your credit report can significantly affect your credit score.
Make minimum payments on all of the debt
Remember to continue making minimum payments on all of your debt. If you miss a payment, the debt could enter default, or you could owe a late payment fee. Either way, it’s a costly mistake.
If possible, set up autopay to prevent accidentally missing a payment. For many private student loans, enrolling in autopay can knock 0.25% off of the interest rate.
Put extra money on the smallest debt until it’s paid in full
After making the minimum payments, put any extra money you have on the smallest debt. How much extra depends on your financial situation. To get a good idea of how much money you can afford to pay on your debt each month, make a budget, or use a personal finance app like Mint.
Note, Dave Ramsey suggests that before making any extra payments, you should first:
- Be current on your utility bills
- Save a $1,000 starter emergency fund
Move onto the next smallest debt until all of your debt is paid in full
After you pay off your smallest debt, move onto the next smallest debt. When that one’s paid off, move onto the next one. And so on and so on until you’re debt-free!
Does the Debt Snowball Method Work?
The debt snowball method does work. It helps people take control of their personal finances and get out of debt. However, it’s not the “cheapest” way to pay off your debt.
In his book, Total Money Makeover: A Proven Plan for Financial Fitness, Dave Ramsey acknowledges that if you run the numbers, it’s cheaper to pay off your highest interest rate debt first. (This is called the “avalanche method”)
However, Ramsey is still quick to defend the debt snowball method because, to him, personal finance is “20 percent head knowledge and 80 percent behavior.” And, just because a debt payoff method is cheaper doesn’t mean it’s as effective at getting results.
With the debt snowball method, you get quick wins. You pay off the smallest debt in a relatively short amount of time, so you feel more motivated to keep knocking down your debt. That’s why Ramsey encourages others to use the debt snowball method and has made it a core part of his Financial Peace University.
Debt Avalanche vs. Debt Snowball Method
The debt snowball method is praised by many, but it’s not your only option. You can also go with the debt avalanche method. The debt avalanche method involves paying off your debt in order of the highest interest rate to the smallest interest rate.
Sometimes, comparing both methods yields the same result. This happens in cases where your smallest loan balances are also the loans with the highest interest rates.
More often than not, however, the debt avalanche method saves you more money than the debt snowball method. Why? Your high-interest rate debt (regardless of the loan balance) is actually your most expensive debt because it grows at the fastest rate.
Using a website like unbury.me makes it easy to compare both methods using the debt list you created. Just input your loans and debt, the balances, the interest rate, and the minimum payment amount.
To show you how the two methods compare, we put the following loans into unbury.me:
|Type||Debt Amount||Interest Rate|
|Credit Card 1||$1,500||16.70%|
|Credit Card 2||$3,000||19.01%|
|Fed Student Loan 1||$2,500||4.00%|
|Fed Student Loan 2||$3,500||4.00%|
|Fed Student Loan 3||$950.00||3.50%|
|Private Student Loan 1||$10,000||7.99%|
|Private Student Loan 2||$12,000||6.50%|
Debt Avalanche Results
With the debt avalanche method, you pay off Credit Card 2 with the 19.01% interest rate first and Federal Student Loan 3 with the 3.5% interest rate last. If your monthly payment is $473 total, but you pay an extra $100 each month, you will pay off all of the debt in 5 years and 11 months. The total interest paid would be $7,177.00.
Debt Snowball Results
With the debt snowball method, you pay off Federal Student Loan 3 with a loan balance of $950.00 first and Private Student Loan 2 with a loan balance of $12,000 last. Making that same extra $100 monthly payment each month, you will pay off all of the debt in 6 years and 1 month. The total interest paid would be $8,212.94.
In this scenario, going with the debt snowball method costs an extra $1,035.94 and takes an additional month.
So, Is Debt Snowball Right for Me?
There isn’t a universal debt management method that’s best for everyone.
If you’re already motivated to pay off your debt, then the debt avalanche method will likely save you the most money.
If you’re not the best with staying motivated, the debt snowball method might work best for you because you’ll actually pay off your debt.
Just know that choosing how to pay off debt is an individual decision, and it doesn’t have to be set in stone either. If you start out with one method and don’t like it, you can easily switch to the other to save money or to feel more motivated.
Learn more about debt management with these articles:
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College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. (1)The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. (2)$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. (3)This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 1/27/2021. Variable interest rates may increase after consummation.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
Ascent: Ascent’s undergraduate and graduate student are funded by Bank of Lake Mills or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 9/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs require interest-only payments, the shortest loan term, and a cosigner, and are only available to our most creditworthy applicants and cosigners with the highest average credit scores.
*The minimum amount is $2,001 except for the state of Massachusetts. Minimum loan amount for borrowers with a Massachusetts permanent address is $6,001.