Debt Snowball Method: How It Works, When to Use It

Debt snowball: How it works in 5 steps

With the debt snowball method, you pay your smallest debt in full first, then roll the amount that was going toward that bill into paying off your next-smallest one.

The amount you're paying on that first debt keeps growing — much like rolling a snowball down a hill.

You are still making payments on all of your debts. You're just putting putting extra money toward the account with the smallest balance. Here’s how to use the debt snowball method in five steps:

1. Make a list of all of your debts and arrange them by balance, from smallest to largest. Disregard the interest rate on each.

2. Pay the minimum monthly payment for every debt.

3. Figure out how much money beyond minimums you can devote to reducing your debt. Every month, put that extra money toward your smallest debt — even if you are paying more interest on a different one.

4. Once the smallest debt is repaid, take the entire amount you were paying toward it (monthly minimum, plus the additional money you were paying) and target the next-smallest debt.

5. Keep knocking off debts and then diverting all the freed-up money toward the next debt in line.

Here’s how this method could look in real life: If you have a hospital bill for $1,200 that the hospital is allowing you to pay interest-free, and two credit card bills for $5,000 (at 22.9% interest) and $3,000 (at 15.9%), you’d pay more than the minimum on the hospital bill first.

That’s right — you’d pay the interest-free loan before you pay those that accrue interest.

When to use the debt snowball method

Consider the debt snowball method if small victories upfront — the satisfaction of seeing debts eliminated one by one — will keep you motivated.

The debt avalanche strategy is the opposite. It prioritizes paying off high-interest debt first. Debt avalanche might save you more on over time, but it also might take you may take longer to get the first debt wiped out.

If you need to front-load your payoff journey with early victories in order to stick with it, snowball is for you.

If your unsecured consumer debts — such as credit cards and personal loans — would take more than five years to pay, consider exploring debt relief options.

How to add 'debt snowflakes' to your snowball

“Debt snowflakes” are small daily savings. For example, if you cut one restaurant meal per week and put the money saved toward debt, that would be a snowflake. Every little bit counts.

Look for ways to free up more money in your budget to speed up your debt snowball efforts. You could pick up a side hustle to earn more money. You could also negotiate with service providers — so that you spend less on the internet, your cell phone, etc.

Don't ignore opportunities to get lower rates on larger, high-interest debts. Debt consolidation, which combines multiple debts into a single payment, usually at a lower interest rate, could be an option.

• You may be able to transfer a credit card balance to a lower-rate card, or one with a 0% introductory APR.

• You could also look into a debt consolidation loan.