When you carry large amounts of debt across different credit cards and loans, it’s easy to feel snowed under. Making the minimum payment on each leaves you paying a lot in interest and doesn’t make it easy to eliminate all that debt.
One debt repayment strategy you might want to consider is the debt snowball. Many find it to be an effective method of paying off outstanding debt, and it may help you get back to healthy financial practices faster.
Let’s look at what a debt snowball strategy looks like, including how to use a debt snowball calculator.
Debt Terms Defined
Before we go into creating a debt reduction plan, let’s make sure you’re up to speed on certain debt terms.
Interest Rate: The interest rate is the percent of the amount you borrow that you pay to the lender in addition to the principal.
Annual Percentage Rate: This is the interest rate charged per year for purchases you make with a credit card, and may include other fees.
Minimum Payment: Loans and credit cards have a minimum amount you must pay each month on the balance, though you certainly can pay more.
Bankruptcy: If you’re unable to pay off your debts, filing bankruptcy may be a last-ditch solution to consider. Essentially, it reduces or eliminates your debts. Know that it will negatively impact your credit for many years. That’s why it’s worth it to come up with a plan for the ultimate debt payoff strategy.
💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.
What Is the Debt Snowball?
Just like an actual snowball, the debt snowball method starts out small. You first tackle the smallest debt balances you have. Once those are paid off, you apply what you were paying on those to the next smallest debts. You continue to pay at least the minimum due on all your debts.
However, by focusing your attention on one debt at a time, you then free up more money to make larger payments on other debts until it’s all gone. Your snowball of debt repayment, so to speak, grows over time.
Benefits of the Snowball Method
The snowball method is one of the fastest ways to pay off debt. And over time, this method will help you have fewer payments as you pay off credit cards and loans and put more money to the remaining debt.
Drawbacks of the Snowball Method
The smallest debts you have may not be the ones with the highest interest. So while you’re paying off the little loans, the debts with higher interest continue to accumulate interest, which adds to your debt.
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Debt Snowball vs. Debt Avalanche
If you have larger loans with higher interest, the debt snowball method may not be your best option. You might also explore another popular way to pay off debt: debt payoff strategy, the debt avalanche method.
With the debt avalanche method, you start paying down the loans and credit cards with the highest interest first. By doing so, you reduce the amount of debt you have at those higher interest rates, which slows down the amount of interest that accumulates over time.
Just like with the snowball, you pay off one debt and then put the money you were paying on that debt toward the loan or card with the next highest interest rate until it’s all paid off.
💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.
How Is Debt Snowball Payoff Calculated?
To use the debt snowball payoff method, you’ll need to gather information about all the debt you have. Let’s use the following example:
• Personal loan 1 balance: $3,000
◦ 12% interest
◦ Minimum payment: $100 per month
• Credit card A balance: $2,000
◦ 17% interest
◦ Minimum payment: $25 per month
• Credit card B balance: $1,000
◦ 22% interest
◦ Minimum payment: $30 per month
• Personal loan 2 balance: $750
◦ 8% interest
◦ Minimum payment: $20 per month
Even without a snowball debt payoff calculator, you can reorder these debts so that you focus on the one with the lowest balance first:
• Personal loan 2: $750
• Credit card B: $1,000
• Credit card A: $2,000
• Personal loan 1: $3,000
Now that you’ve ordered your debts from least to greatest, you can see how, once you pay off the $750 loan, that money can go toward the credit card with the $1,000 balance. Once that’s paid off, you put all that money toward paying off the $2,000 credit card balance, and then finally, to pay off the $3,000 loan.
Debt Snowball Payoff Examples
Let’s look at what the monthly payments for these reordered debts would look like, if you were able to set aside $400 a month toward paying them off.
| # Payments | Personal Loan 2 ($750) | Credit Card B ($1,000) | Credit Card A ($2,000) | Personal Loan 1 ($3,000) |
|---|---|---|---|---|
| 1 | $245 | $30 | $25 | $100 |
| 2 | $245 | $30 | $25 | $100 |
| 3 | $245 | $30 | $25 | $100 |
| 4 | $25.19 | $249.81 | $25 | $100 |
| 5 | – | $275 | $25 | $100 |
| 6 | – | $275 | $25 | $100 |
| 7 | – | – | $300 | $100 |
| 8 | – | – | $300 | $100 |
| 9 | – | – | $300 | $100 |
| 10 | – | – | $300 | $100 |
| 11 | – | – | $300 | $100 |
| 12 | – | – | $300 | $100 |
| 13 | – | – | $300 | $100 |
| 14 | $260.72 | $139.28 | ||
| 15 | – | – | – | $400 |
| 16 | – | – | – | $400 |
| 17 | – | – | – | $400 |
| 18 | – | – | – | $400 |
| 19 | – | – | – | $400 |
| 20 | – | – | – | $400 |
| Total principal & interest | $7,568 | Total interest | $829 |
As the chart shows, what might have taken you years to pay off can be paid off in under two years with the debt snowball method.
One way to keep your finances on track while you’re paying off debt is to create a budget. A money tracker app can help you come up with a spending and saving plan that works for you.
Is a Debt Snowball for You?
There’s no one-size-fits-all when it comes to debt payoff strategies. But to determine whether the debt snowball method is right for you, consider how many different debts you have as well as their interest rates. If your larger debts have higher interest rates, you might consider the avalanche method.
But if your interest rates vary, or the smaller debts have higher interest, you might benefit from paying off those lower amounts first before snowballing those payments into the larger debts.
The Takeaway
If you’re trying to pay off outstanding debt, you have options. The debt snowball method has been proven effective for many people. If nothing else, it’s a way for you to focus your attention on whittling down debt and minimizing how much you pay in interest.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
FAQ
How long to pay off debt using snowball?
The amount of time it takes to pay off your debt with the snowball method will depend on how much debt you have and how much you can budget to pay it down. However, you may be able to pay off your debt faster with this method.
What is the best way to pay off debt using the snowball method?
The debt snowball method pays off your smallest balances first, then rolls those payments up toward the larger debts until they are all paid off.
What are the 3 biggest strategies for paying down debt?
To pay down or pay off debt, you can consider the debt snowball method (which pays off the smallest balances first), the debt avalanche method (which pays off the balances with the highest interest first), or debt consolidation (which provides a new loan with a single payment and single interest rate).
Photo credit: iStock/Abu Hanifah
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