Anyone familiar with Dave Ramsey may have heard of his theory on the “debt snowball”.  Although much of what Ramsey has to offer is constructive, the concept behind the debt snowball needs further analysis. Here is an overview of the theory and why it mathematically doesn’t work for the vast majority of average Americans.

The debt snowball refers to Dave Ramsey’s advice that if an individual has several credit cards to pay off, they should begin with the lowest balance first, regardless of the interest on the card itself. His idea suggests that “quick wins change behavior” and that these wins will add up “until you reach your goal of becoming debt-free”, thus creating a snowball effect. This may work if an individual has a combined debt of less than \$5,000 and can pay their debts of quickly, however most Americans have more complex financial issues to deal with.

### An example

According to Federal Reserve statistics, the average U.S. household owes \$15,185 in credit card debt alone. Dave Ramsey doesn’t factor in the interest accrued on a higher balance card, especially if the interest rate is higher than the smaller credit card balances that he suggests consumers pay off first. For example, let’s say an individual has two credit cards (using the above household average): one, with a balance of \$5,000 at 8% interest and a \$100 minimum payment, and the second, with a balance of \$10,000 at 14% interest and a \$200 minimum payment. He has \$500 to put toward debt payoff every month.

Using Dave Ramsey’s payoff method, he’d pay just \$200 on the \$10,000 debt and \$300 on the \$5,000 debt until it was paid off. With this scheme, he’d be debt-free in just over three years and would pay \$3,600 in interest.

Using the mathematically rational method, he’d pay \$100 on the \$5,000 debt and \$400 on the \$10,000 debt until it was paid off. He’d be debt-free one month faster, and would pay nearly \$500 less in interest payments.

### The takeaway

The bottom line is that it will cost you more in interest if you tackle the smaller amount first. This is why it makes more financial sense to pay off the higher interest rate regardless of the amount. It may feel like you are not getting anywhere tackling the bigger balance with the higher interest rate, however, you will pay significantly less interest as a whole.

Dave Ramsey’s “debt snowball” may feel good in the short term, but will undoubtedly create a large “interest snowball” in the long term. In general, it is always better to pay off the highest interest rate first, especially if the higher interest credit card or loan has a large balance compared with your other debt. Additionally, always try to negotiate a lower interest rate every few months with your credit card companies. Often, this will make a big difference in reaching your financial goals.