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How does the debt snowball method work?

No matter what the interest rates look like, the debt snowball method focuses on paying off your smallest debts first.

For example, let’s say you have three debts:

  • A $10,000 student loan at 6.2% interest with a minimum monthly payment of $100.
  • A $6,000 credit card balance at 22% APR with a minimum monthly payment of $120.
  • An interest-free $2,000 personal loan with a minimum monthly payment $50.

And let’s assume that you have an additional $300 a month to devote to your debt thanks to a side hustle.

Because the $2,000 personal loan is the smallest debt, you would start there. Meanwhile, make only the minimum monthly payments on the others: $100 on your student loan and $120 on your credit card. You’ll have $350 remaining to put toward your personal loan: the $50 minimum payment plus your extra $300.

At that rate, you’ll be able to fully pay off the personal loan in a little under six months. Exciting, right? You’ll then move on to the credit card balance, which is your next smallest debt.

You’ll still make the minimum payment of $100 on your student loan, but now you’ll roll the $350 a month you were spending on your personal loan into your credit card payment, causing your $120 credit card payment to snowball to $470.

Once your credit card is fully paid off, you’ll roll that $470 into your student loan payments, contributing a total of $570 every month.

Now you only have one debt left, and you’re able to make more than five times the minimum payment.

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Why use the debt snowball method?

The main draw of the debt snowball method is that it helps boost your confidence in your ability to become debt-free.

By starting with the smallest debts you’ll see progress quickly, and that can be a powerful motivator to keep up the good work.

Plus, in addition to cutting down your total number of debts, you’re freeing up more cash to cover your bigger debts down the road.

When the time comes, you’ll be able to put down hundreds of dollars more than the minimum payment on your biggest debt, which will make paying it off seem much more achievable.

Debt snowball vs. debt avalanche

The avalanche in the Himalayas on Anapurna mountain
Ovchinnikova Irina / Shutterstock

The debt snowball and debt avalanche methods are opposites when it comes to the debt you target first.

With the debt snowball method, you only care about the size of the debt and don’t pay any attention to the interest rates.

With the debt avalanche method, your interest rates are the most important factor: You pay off the debt with the highest interest rate first and make minimum payments on all the others. Using the same debts from the example above, you’d start by clearing your $6,000 credit card bill, since it's accruing the highest amount of interest. The longer you leave that interest to accumulate, the more money you’ll owe and the worse your debt problem will become.

The debt avalanche strategy can potentially save you hundreds of dollars in interest, but it will also require more patience — you won’t feel much progress right away, especially if your biggest debts are the ones with the highest interest rates.

If you have nerves of steel, the debt avalanche method might be the way to go.

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Is the debt snowball method right for you?

The debt snowball method does have its downsides. It leaves you vulnerable to high interest charges on your larger outstanding debts, and this method can cost you more money in the long run.

But if you're a goal-oriented person who needs to see progress in order to keep yourself motivated, the debt snowball method is a great way to tackle the problem.

To reduce the amount of interest fighting you along the way, you might look into consolidating some of your debt with a low-interest personal loan.

If you’ve got multiple credit cards with high APRs, a debt consolidation loan will allow you to trade them all in for a single monthly payment at a lower interest rate.

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Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

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