JGI/Jamie Grill / Getty Images During the process, continue making the required minimum payments on all of your loans, putting any extra money each month toward the smallest loan balance. Dave Ramsey originally popularized this method, and since then, many people have used it to successfully pay off their debts.
How the Debt Snowball Method Works
Setting up the debt snowball strategy is simple and involves just a few steps.
The Debt Snowball in Action
Assume you have several loans outstanding. Your budget shows that you have an additional $100 available each month for extra loan payments. You can put that $100 to work and pay off debt by using the debt snowball strategy. Start by listing each loan or credit card debt from the smallest loan balance to the largest. After you pay off each loan, that loan’s payment becomes available for additional debt payments.
After paying off your personal loan, you now have $139.60 extra for the next loan (because you don’t have minimum payments to make to your personal loan lender anymore). You can send extra money each month to your student loan servicer. The payment will be the required $183.74 plus $139.60, for a total of $323.34.After paying off your student loan, you have an additional $323.34 available each month for paying off your credit card.The process continues to build momentum until you finally wipe out all of your debts.
Debt Snowball vs. Debt Avalanche
The debt snowball differs from another popular debt repayment strategy—the debt avalanche. The avalanche method, also known as debt stacking, prioritizes debts with the highest interest rate (instead of the smallest loan balance). It lowers your total interest costs and will make you debt-free faster, but it may not give you those quick wins to stay motivated. In the example above, you would prioritize the credit card instead of the personal loan because of the credit card’s rate. But paying down that $16,000 balance could take a long time, and you risk becoming discouraged. A debt snowball provides a sense of accomplishment early in the process, and you may appreciate that positive reinforcement.
Should I Use the Debt Snowball Method?
The debt snowball is an excellent debt elimination strategy. If you enjoy positive reinforcement in small victories and don’t have a lot of high-interest debt, it could be a good option for you. The snowball method isn’t right for everyone, though. In some cases, it might not make sense to accelerate your payments on certain debts. For example, if you’re pursuing Public Service Loan Forgiveness for federal student loans, the Department of Education might allow you to stop paying after 120 qualifying payments. If successful, the remainder of your debt will be forgiven, so there isn’t much benefit to paying extra. Instead of paying extra on those loans, it may be best to pay as little as possible under income-driven repayment and put extra money toward other high-interest-rate debts. Whichever strategy you choose, it’s important to find the one that you feel you’ll be able to stick to until all your debts are paid. The avalanche, for example, won’t save you money if you end up stopping halfway.
What to Do If You Need Help
While the debt snowball helps you eliminate debt when you have extra income, sometimes you need additional help. Several options are available.
Credit Counseling
Credit counseling agencies are nonprofit organizations that provide education and assistance with debt. You can discuss your situation with a professional, and if necessary, the agency can help you establish a debt management plan (DMP). When using a DMP, you may be able to lower your monthly payments and interest rates, making it easier to manage your loans.
Debt Settlement
Debt settlement is another option, and is considered a more extreme solution. Debt relief companies help individuals manage their outstanding debts by negotiation or consolidation of balances. The service will work out a payment plan, or even help individuals file for bankruptcy in exchange for a fee. Creditors need to agree to the deal, though, and lenders might not be willing to accept your offer. Debt settlement can also hurt your credit score, so it’s best to exhaust all of the alternatives before going down this road.
