The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.
The truth about the debt snowball method is it's a motivational program that can work at eliminating debt, but it's going to cost you more money and time – sometimes a lot more money and a lot more time – than other debt relief options.
An Example of the Debt Snowball
$500 medical bill—$50 payment. $2,500 credit card debt—$63 payment. $7,000 car loan—$135 payment. $10,000 student loan—$96 payment.
The debt avalanche is a systematic way of paying down debt to save money on interest. Individuals who use the debt avalanche strategy make the minimum payment on each debt, then use any remaining available funds to pay the debt with the highest interest rates.
Paying off smaller balances first (debt snowball method) gives you motivation to keep going. Paying off higher-interest debt first (debt avalanche method) can save you more money. Paying off debt is good for your financial and mental health. What matters most is that you choose a method and stick with it.
The best way to pay off $3,000 in debt fast is to use a 0% APR balance transfer credit card because it will enable you to put your full monthly payment toward your current balance instead of new interest charges. As long as you avoid adding new debt, you can repay what you owe in a matter of months.
If you were to make only the minimum amount due on all of your debt, it would take about five years to become debt free. In contrast, using the debt snowball method by paying an extra $100 a month on your smallest balance, you'd be out of debt in about three years and save nearly $1,800 in interest.
You can use the debt snowball to achieve quick wins, build up momentum and improve your money-management skills as you pay down debt. The significant downside of this approach is the interest you could incur by not focusing on the most costly debts first.
Does not save maximum interest: The debt snowball method is not necessarily the best choice for saving money on interest. Because you're prioritizing balances over interest rates and only making minimum payments on debts that are low on the list, you could end up paying considerably more in interest over time.
Because the snowball method allows you to pay small debts off first, you can quickly reduce your debt utilization, improving your credit score.
To pay off $40,000 in credit card debt within 36 months, you will need to pay $1,449 per month, assuming an APR of 18%. You would incur $12,154 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
the avalanche method. The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed.
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
The stacking method works the same way as the snowball method, but you prioritize your debts differently in this method. Rather than listing them from smallest to largest, list them from highest interest rate to lowest interest rate regardless of the dollar amount. You then pay each as described in the snowball method.
While you can tap into savings to pay your credit card bill—especially if you've got mounting credit card debt and a flush savings account—it's not something you should get into the habit of doing. Using savings to cover a credit card bill will have a negative impact on your savings goals.
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Some debt reduction options work the best for people with no money and credit that ranges from fair to bad. Those options include: Debt Management Program – Nonprofit credit counseling agencies can help you put together a budget and discuss options, including a debt management plan.
When prioritizing paying off your debt, start with the balance that has the higher interest rate (likely your credit cards) and go from there. No matter what type of debt you'll be dealing with, though, the most important factor is that you pay your bills on time.