- Review different strategies for paying down debt.
- Compare debt snowball and debt avalanche.
- Debt negotiation is a form of debt consolidation that reduces your total debt.
There are many ways to approach debt. One of the most common strategies is the debt snowball method, which, as its name suggests, works like a snowball rolling down a hill. You start slow, gradually gaining ground and paying off more of your debt over time. Eventually — if you stick to the plan — you repay your debts in full.
Are you interested in paying down your debts more effectively and efficiently? Here’s what to know about the snowball method — and how it may be able to help.
What Is a Debt Snowball Strategy?
The debt snowball strategy aims to create “a snowball of debt payments,” as the Consumer Finance Protection Bureau puts it. When using it, you work on paying off your smallest-balance debt first. This means you’ll make minimum payments across all your debts and put any extra funds you can toward the smallest one — until you’ve fully paid it off.
After you've cleared that debt, take aim at the next-lowest balance. As you pay off your debts, you free up more and more funds. So the amount you can pay grows larger (like a snowball). This approach allows you to pay off the next debt more efficiently.
If you have several small debts, the snowball strategy can deliver fast results. While it's not always the cheapest option in the long run, it does allow you to feel like you’re making tangible progress in a short amount of time. This may motivate you and keep you focused on your goal.
How to Use the Debt Snowball Method
Start with the CFPB’s debt reduction worksheet. Print or copy the chart and list all your debts, including their balances, monthly payment, and monthly due date, in ascending order from the smallest to largest amounts owed. On the smallest balance, you'll also add in your "extra" payment. This is the amount of disposable income you can put toward paying that balance while still making the minimum payments on the others.
When you’ve paid off that top debt in full, mark the paid-in-full date on the chart. Then move to the next-smallest debt, and add your previous debt’s payment (minimum monthly payment plus your extra payment) to the minimum payment required on the next debt. You will now focus on paying down this balance before moving on to the next one.
You’ll continue this process, taking on one debt after the other until you’ve paid every single one in full. (Continue making minimum payments on all your other debts as you progress down the ladder. You don’t want late fees throwing you off-course.)
Pros and Cons of the Debt Snowball Method
Debt is hard to pay off, and it can be challenging to stick with a payment plan for the long haul. Fortunately, that’s where the snowball strategy really shines. Since it breaks up your debt into smaller, more achievable goals, you begin to see results and feel change faster.
Paying off that first, smaller debt can give you a feeling of accomplishment and motivate you to keep following the plan. In fact, many studies show the value of subgoals as a motivator (here’s one from Texas A&M University, for example).
Another advantage of using the debt snowball to pay off debts is that it quickly reduces the number of balances you have. This can make it easier to manage payments and keep to your due dates.
- You typically see results faster
- It may offer motivation to continue paying down your debts
- It reduces the number of debts and payments you have quickly
The downside of the snowball strategy lies in the math. Since you’re tackling the smallest debt first, your larger debts continue to accrue interest (more than your smaller debts would accrue by nature). Additionally, if your smallest debt is not your highest-rate debt, you’re losing money there too.
For these reasons, the snowball method can be more expensive in the long haul. It also may take you longer to pay down all your debts, as your balances will grow faster on highest-interest loans, extending the time they take to pay off.
- It can often be more expensive in the long run
- It may take longer to pay off your debts fully
Who should use a debt snowball to pay off debt?
The snowball method is best if you’re worried about staying on track with your debt repayment goals. Because it allows you to achieve tangible results faster, it can often be a great motivator to stay on track and keep going.
If you only have low-interest balances — like a mortgage or car loan, for example, you might also consider using the debt snowball to pay off your debts. However, it might not work best if your larger balances also carry your highest rates.
Keep in mind: The snowball strategy is not the only option for paying off your debts. If you’re not sure it’s the right move, talk to a financial advisor or credit counselor. You can also explore the alternative payoff options and debt relief strategies noted below.
Alternatives to the Debt Snowball Method
Using the debt snowball to pay off debt can be smart for some consumers, but it’s not right for everyone. If it doesn’t feel like a good fit for your needs, you might consider the avalanche method, sometimes called the highest-interest rate method. As its name suggests, this strategy targets your debt with the highest rate first, usually saving you more on long-term costs than the snowball method would
It does have its downsides, though. Unlike the debt snowball, you may not see quick results — especially if your highest-rate debt is also the debt with the largest balance. In this scenario, it could take a considerable amount of time to pay off just one debt and feel that sense of achievement. It may also mean managing multiple debts for longer.
Beyond the avalanche strategy, you can also explore other options for tackling your debt. These can include:
- Working with your creditors: Some creditors may be willing to work with you on your debt. They may restructure your terms or rate to make your payments more affordable, or they may even let you settle your debt entirely for a reduced amount (you’ll typically need to pay this all at once in cash if you go this route).
- Getting on a debt management plan (DMP): Debt management plans are holistic solutions that help you attack several debts at once over a set time period. Rather than paying all your creditors separately, you’ll make just one payment a month, and your DMP administrator (usually a credit counselor) handles the dispersal. This streamlines payment on your end and helps you stay on track.
- Refinance your debt: If you have loans with particularly high rates, you may be able to refinance those into lower-rate options — especially if your credit score has improved since applying. This can reduce your monthly payment and help you pay off your debt more effectively.
- Consolidate your debt: If you have several debts to your name, consolidation could help. This means taking out a new loan — ideally one with a lower rate than your current debts — and using that to pay off your balances. This strategy rolls those debts into a single one, giving you just one payment a month (and hopefully a lower rate).
- File for bankruptcy: This should always be a last resort, but bankruptcy may be an option if you can't successfully manage your debts. Depending on your situation, bankruptcy can wipe some or all of your debts clean. It will also remain on your credit report for seven to 10 years and could impact your financial options down the line, so tread carefully here.
You could also increase your income or sell some things you don’t use. Perhaps by requesting a raise, renting out space in your home, taking on more hours at work, or adding a side hustle. All can give you more discretionary funds to put toward your debts and, ideally, pay them off quicker and more efficiently.
Finally, understand that increasing your debt payments won’t help if you don’t also stop overspending. When you find yourself in a hole, stop digging.
Should I concentrate on saving money while paying down debt?
That depends. If you don’t have an emergency account, you should direct money each week until you have saved at least a few hundred dollars. And if your employer matches contributions to your 401(k), keep saving there, too. Employer contributions are free money. Other forms of saving, though, probably pay less interest than your debts are costing. Suspend deposits to low-interest accounts until your high-interest debt is gone.
What if I lose my job during my debt snowball?
If you lose your source of income, pt yourself into survival mode. Cut all expenses you can and stop accelerating debt repayment. Turn off subscriptions, stop eating out, buy cheaper food, sell what you can, and try to keep from increasing your debt any more than you have to. Once you’re back working and on track, keep your belt tight until you clear any extra debt you added. Then resume your plan to get free of debt.
What if I have a financial emergency?
If you have to use your emergency funds, pause your snowball until you have rebuilt your emergency fund. Then resume your plan.
Dealing with debt
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in District of Columbia, 20% have student loan debt. Of those holding student loan debt, 8% are in default. Auto/retail loan delinquency rate is 8%.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.