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Snowballing Debts

Snowballing Debts

The debt-snowball method of debt repayment is a form of debt management that is most often applied to repaying revolving credit — such as credit cards. Under the method, extra cash is dedicated to paying debts with the smallest amount owed. As each smaller debt is repaid in full, the monthly money used to pay that debt is then applied toward making additional payments on the next-smallest debt, and so on until all debts are repaid.

The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.

The basic steps in the debt snowball method are as follows:

  • List all debts in ascending order from smallest balance to largest.  This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
  • Commit to pay the minimum payment on every debt.
  • Determine how much extra can be applied towards the smallest debt.
  • Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
  • Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying that second smallest debt.
  • Repeat until all debts are paid in full.
  • In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

    The theory works as much on human psychology; by paying the smaller debts first, the individual, couple, or family sees fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.

    For example, A person has the following amounts of debt and additional funds available to pay debt -

  • Credit Card A - $250 balance - $25/month minimum
  • Credit Card B - $500 balance - $26/month minimum
  • Car Payment - $2500 balance - $150/month minimum
  • Loan - $5000 balance - $200/month minimum
  • The person has an additional $100/month which can be devoted to repayment of debt.
  • First two months - under the debt-snowball method, payments would be made to the creditors as follows:

  • Credit Card A - $125 ($25/month minimum + $100 additional available)
  • Credit Card B - $26/month minimum
  • Car Payment - $150/month minimum
  • Loan - $200/month minimum
  • Third month balance (presuming the person has not added to the balances, which would defeat the purpose of debt reduction) - Credit Card A would have been paid in full, and the remaining balances as follows:

  • Credit Card B - $448
  • Car Payment - $2200
  • Loan - $4600
  • Third month payments - the person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:

  • Credit Card B - $151 ($26/month minimum + $125 additional available)
  • Car Payment - $150/month minimum
  • Loan - $200/month minimum
  • The primary benefit of the smallest-balance plan is the psychological benefit of seeing results sooner, in that the debtor sees reductions in both the number of creditors owed and the amounts owed to each creditor.

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