Debt snowball method: A way to earn quick wins and stay motivated
Get the ball rolling on your debt-free future with the debt snowball method.
Contributing Writer at Tally
October 30, 2020
Whether your goal is to boost your credit score or save on high-interest credit card debt, having a debt-reduction plan will help. There are several ways to get out of debt faster, but the two most common are the debt snowball and debt avalanche methods.
Both payoff methods start with small monthly payments that increase over time. The debt snowball method prioritizes debts with the smallest balances first, while the debt avalanche method prioritizes debts with the highest interest rates.
We'll cover the debt snowball and debt avalanche methods, along with their pros and cons.
Debt-free life starts with budgeting
No matter which debt payoff strategy you follow, both require budgeting.
To make significant progress with the debt snowball or debt avalanche methods and get out of debt faster, you want to pay more than the minimum payments.
To free up cash and make higher payments, try creating a budget and reducing your spending on non-essentials. Without a firm budget, you may overextend yourself financially, fall off track and end up going deeper into debt.
Don’t worry if you can’t put a large amount of money toward your debt. Adding even a small amount of extra money toward your credit card bills and other debts will get you closer to financial freedom.
Debt snowball method
A popular way to pay off debt quickly is the debt snowball method. This method works by prioritizing credit cards and other debts with the lowest balances.
You start by setting aside the money to cover all your minimum monthly payments. Then, add the remaining money in your budget to the payment toward your smallest debt.
Once you pay off the smallest debt, take that entire payment and put it toward your next smallest debt while continuing to make minimum payments on your other debts.
By sticking to a budget and paying the same amount toward your overall debt every month, the impact of your payments will increase while your debt decreases. Repeat this process until you pay off all your debts.
For example, consider you have the following three debts:
Credit card 1: $500 balance at 20% interest with a $30 monthly minimum payment
Credit card 2: $1,500 balance at 25% interest with a $50 monthly minimum payment
Car loan: $15,000 balance at 5.25% interest with a $350 monthly minimum payment
Since credit card 1 has the lowest balance, you’ll pay it off first. If you have $500 per month to put toward paying debts, you make minimum payments on credit card 2 and your car loan while paying $100 per month on credit card 1.
Once you pay off credit card 1, you add its entire payment ($100) on top of the minimum payment for credit card 2 ($50), making a total payment of $150 per month. You pay $150 per month on credit card 2 while continuing to make the minimum monthly payment on your car loan until you pay off credit card 2.
When you pay off credit card 2, add its full payment ($150) to your car loan, bringing the total monthly payment to $500. You then pay $500 per month on your car loan until it’s paid in full.
Debt avalanche method
The debt avalanche method works by prioritizing credit cards and other debts with the highest interest rates.
Like the snowball method, the debt avalanche method allows you to start with smaller payments. As you pay off debts, the impact of your monthly payment grows.
To follow the debt avalanche method, cover all your minimum monthly payments then add any extra funds in your budget to the minimum monthly payment on the highest-interest debt. If you have multiple debts with the same interest rate, prioritize the one with the highest balance.
Once you pay off the highest-interest debt, add that entire payment to the minimum payment on the debt with the next highest interest rate. Repeat this process until you’ve paid off all your debt.
Using the example debts and budget above, you'd pay off credit card 2 first because it has the highest interest rate. That means you make the minimum payments on credit card 1 and your car loan, and then put the remaining $120 in your budget toward credit card 2.
Once you pay off credit card 2, apply its entire payment to the minimum monthly payment on credit card 1, making its total monthly payment $150. You continue paying the $150 per month on credit card 1 while making the minimum monthly payment on your car payment.
After paying off credit card 1, add its entire payment to your car loan, bringing its total monthly payment to $500. Continue paying $500 per month on your car loan until you're debt-free.
Choosing the right debt repayment method
The debt snowball and debt avalanche methods are effective ways to pay off debt without too much stress on your budget. However, each has its distinct advantages. Their key benefits will help you decide which approach is right for you.
Debt snowball method’s key benefit
The debt snowball method prioritizes your smallest balances, allowing you to reach your first debt repayment milestone quickly. The debt snowball method’s quick-win nature is great if you sometimes struggle with staying on track.
The downside to the debt snowball plan is that paying off your smallest debts first may leave you paying only the minimum payments on high-balance, high-interest debts. Over time, these interest rates add up and you will likely pay more in interest charges over the long term.
Debt avalanche method’s key benefit
The debt avalanche method is preferred for one main reason: savings.
By prioritizing interest rates, the debt avalanche method saves you money on interest every month throughout your debt payoff plan. This makes the debt avalanche the better method for someone who's focused on saving as much on interest charges while reaching their debt-free goal.
The downside of the debt avalanche method is that it may take a while to reach your first debt payoff milestone. This longer time to pay off your first debt may dampen your motivation over time, leading you to stray from your path.
Accelerate your debt payoff with reduced interest
Whether you choose the debt snowball method or debt avalanche approach, you can speed up your debt repayment plan and save money by reducing your interest rates. Below are a few ways to make that happen.
Line of credit
A line of credit is a revolving account that you can use more than once to pay off your high-interest credit card debt. For example, Tally's line of credit offers a significantly lower interest rate than most credit cards, saving you money throughout your debt payoff plan.
You can also pay off multiple credit cards at once with a line of credit, reducing your number of monthly payments. Plus, you can use a line of credit while following either the debt avalanche or debt snowball strategy.
Debt consolidation loan
A debt consolidation loan is another way to reduce interest rates. Similar to a line of credit, a debt consolidation loan often has a significantly lower interest rate than most credit cards. You can use the loan to pay them off and save money over time.
Unlike a line of credit, a debt consolidation loan is a one-time-use account.
On top of the lower interest rate, a debt consolidation loan may allow you to pay off multiple credit cards, reducing the number of monthly payments you have.
You can also include your debt consolidation loan in your debt avalanche or debt snowball payoff plan.
Balance transfer credit card
Some credit card issuers attract new customers or encourage existing cardholders to use their credit cards by offering a 0% interest rate on balance transfers for 12-18 months. With a balance transfer card, you transfer your high-interest credit card debt to a 0% balance transfer card. Moving your debt to a balance transfer card helps you save money on interest charges every month and accelerates your debt payoff plans.
These 0% offers aren’t free, though. Most credit card issuers charge a 3-5% balance transfer fee.
For example, if you transfer $5,000 in high-interest debt onto a 0% credit card, you may pay a $150-$250 fee. That seems like a steep fee, but it's a fraction of what you'd pay in interest over 12-18 months. Whether or not a balance transfer card is right for you depends on the interest rate you’re currently paying and your ability to pay off all the debt before the 0% offer expires.
If you fail to pay off the entire balance before the 0% promotion period ends, you must pay the credit card’s standard interest rate from that point forward. To determine how much you need to pay each month within the promotion period, add the amount you transferred and the balance transfer fee, then divide that number by the promotion timeframe.
You can use a balance transfer card in your debt avalanche or debt snowball strategy.
Get debt-free the easier way
Whether you choose the debt snowball or debt avalanche method, you're on a well-traveled path toward a debt-free life. These debt payment strategies not only add structure to your debt payoff process, but they also offer distinct benefits:
The debt snowball method gives you motivating quick wins as you pay off your smallest balances first
The debt avalanche method helps save you money on your bottom line by focusing on high-interest, high-balance debts
Remember, when getting into any debt repayment plan, always set a budget that allows you to sustain your payoff plan. Without a budget guiding your way, you could put too much money toward repaying your debt and end up in a tight financial spot that may result in accumulating more debt.