How does the debt snowball method work?

One of the most popular debt payoff methods can help consumers blast debt in the new year. (iStock)

The start of a new year is a natural time to focus on eliminating household debt: it’s a fresh calendar and the perfect time to tackle new money resolutions.

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At first, it can be difficult to find a solid strategy to actually begin paying back the balances. For those looking to climb out of consumer debt, the debt snowball is a popular method for making real progress.

What is the debt snowball method?

First made popular by personal finance guru David Ramsey, the debt snowball is a simple strategy that recommends consumers pay off their debts in order from smallest balance to largest.

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The “snowball” name comes from the idea that after paying off the smaller debts, individuals then direct the money spent paying off the smaller debts to make bigger payments and more substantial progress on the larger debts; progressing from one to the other, much like a snowball rolling downhill and gaining momentum.

“The debt snowball is a great tool to help pay off debt faster because it motivates you to see progress when you're paying off debt,” says student loan debt expert Robert Farrington. “By paying off the smallest debts first, you get some quick wins, which hopefully motivates you to keep going.”

How the debt snowball method works

Susie has three consumer credit cards and a large student loan. She lists her debts by balance from smallest to largest.

  • Credit Card #1 - $700, minimum monthly payment $35
  • Credit Card #2 - $2,500, minimum monthly payment, $75
  • Credit Card #3 - $6,700, minimum monthly payment, $125
  • Student Loan - $10,000, minimum monthly payment, $250

Susie has to make the minimum payments on each of her debts each month in order to keep her credit score intact. The trick of the snowball is to put whatever extra she can towards the smallest debt first. In this example, Susie picks up some freelance writing work and is able to contribute an additional $300 per month.

Here’s how this would work:

  • Susie makes a $335 payment on credit card #1 in Month 1 and Month 2 and has the debt completely paid off by the end of month #3.
  • In month #4, Susie then begins contributing $335 from card 1 plus the $75 minimum from card #2 for a total payment of $410 each month until the second debt is completely paid off.
  • Using a debt snowball calculator, we can calculate Susie will pay off the second debt by the end of Month #9 and be completely debt-free 29 months after she started.

To visualize your own snowball payoff strategy and timeline, leverage an online debt snowball calculator or debt snowball form to plug and play with your own debt figures.

Debt snowball method advantages and disadvantages

The debt snowball strategy isn’t for everyone, especially for those concerned about spending more money than necessary.

“The main disadvantage of the debt snowball is it might make you pay a bit more in interest,” said Farrington. “Mathematically, the debt avalanche -- where you pay off the highest interest debt first -- is usually the method that pays the least amount of money.”

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By tackling debts by balance instead of by interest rate, consumers end up paying more interest, for longer, on their most expensive debts. Another drawback to the snowball method is that it relies on the willpower of the consumer to roll extra money into debts. Those with spending problems may find themselves in a cycle of debt, paying off one card only to rack it up again.

Ultimately, financial experts like the snowball method because it harnesses the power of behavioral psychology to leverage “quick wins” in building positive momentum for paying off debt, which can often be a lengthy and frustrating process.

For those still on the fence about which debt payoff strategy to choose, the snowball method is not only popular -- it’s proven to be more effective. Recent research from a 2016 Boston University study found that the participants who focused on the smallest debts first had better success.