What Is the Debt Snowball Pay Down Method?

By Stephen Sellner | Citizens Bank Staff

Are you ready to take control of your debt? Then the debt snowball pay down method might be the strategy for you.

How the debt snowball method works is actually quite simple. Start by ranking your debts in order by the amount you owe, from smallest to largest. Next, put all the money you’ve budgeted for debt repayment toward the smallest of those debts and only pay the minimum payment on your other debts. Then, when that first debt is fully paid off, reallocate that money onto the next smallest debt, and so on and so forth.

The whole strategy — popularized by Dave Ramsey — is based on tackling your debts one at a time. By making minimum payments on your other debts, you’re essentially treading water on those for the time being.

Could this be the best debt repayment strategy for you? Potentially. However, as we’ll explain, there are drawbacks to using this method.

Let’s get started.

Where does the term “snowball” come into play?

Great question! To better explain, let’s use a hypothetical example.

Lindsey has the following debts to pay off:

• Medical bill: $700 (minimum payment: $50)
• Credit card balance: $5,000 (minimum payment: $125)
• Auto loan debt: $10,000 (minimum payment: $175)
• Education refinance loan balance: $15,000 (minimum payment: $200)

These loan balances and minimum payments are for illustrative purposes only. Check with your lender to find out your minimum payment.

Lindsey’s monthly minimum payments add up to $550. On top of that, she calculates she has an extra $650 in her monthly budget to put toward her debt.

Since her medical bill is the smallest, Lindsey tackles that one first. She combines the $50 minimum payment with her extra $650 to make a $700 payment. Just like that, her medical bill has been fully paid off in one month’s time.

Here comes the snowball.

Next up is her credit card debt. Lindsey takes that $700 that she put toward her medical bill last month and snowballs it onto the $125 minimum payment she made toward her credit card that same month. That means she’ll make a $825 payment this month toward her credit card. Lindsey will continue to pay that $825 every month until her credit card bill is completely paid off.

Then comes the auto loan. Lindsey’s $825 monthly payment will snowball to $1,000 after combining with the $175 auto loan minimum payment. Starting to get the gist?

When that’s paid off, the $1,000 monthly payment will snowball into a $1,200 monthly payment on her education refinance loan. Lindsey will make that $1,200 monthly payment until her refinance loan balance is completely paid off.

Before you choose the snowball method…

The debt snowball pay down method is more a mental strategy than a financially savvy one. Since you’re essentially paying off one debt at a time, you may feel like you’re making more progress than if you tried tackling all your debts at once. It provides a chance to celebrate small wins to keep you motivated, which can work very well for some people.

However, the most financially savvy debt repayment plan is to tackle your highest-interest debt first, then your second highest, and so on. (This is also known as the avalanche method.) By making only minimum payments on some of your debts via the snowball method, you’ll pay more interest on them because it’ll take you longer to pay them off. However, you might find this to be a necessary sacrifice if you feel the debt snowball pay down method will help you get out of debt quicker than other repayment strategies. Talk to a financial professional if you need more information.

What are some other debt repayment strategies?

Maybe the debt snowball pay down method isn’t for you. That’s OK! What other options do you have to help pay down your debts?

1. The debt avalanche method: As mentioned before, this debt repayment strategy is more financially savvy than the debt snowball method. You put all of your debt repayment budget toward your highest-interest debt (not the smallest balance, like with the snowball method) and make minimum payments on the others. Once you pay off the first debt, you combine that debt repayment budget to the minimum payment you were making on your next-highest-interest debt, and so on and so forth. The debt avalanche method takes a little more patience since your highest-interest debt might not be your smallest balance and therefore could take longer to pay off. However, since you’re targeting your highest-interest debts first, you’ll save more on interest than you would using the debt snowball method.
2. Consolidating debt with a HELOC: Do you own a home? If so, you may be able to tap into the equity in your home to help you tackle your debts. A home equity line of credit (HELOC) involves taking out a line of credit against the equity in your home. In turn, you can use the funds from your HELOC however you may need. That includes debt repayment, since a HELOC could have a lower interest rate than most or all of your debts. You can draw from your HELOC for years, typically 10, and during that time, you only pay interest on what you draw. That means you could take out a HELOC, draw the money you need to satisfy your debts, and chip away at the money you drew over the course of 10 years. Then, at the end of the 10-year draw period, you’ll make principal plus interest payments on your remaining balance. (Note: You’ll need at least 15-20% equity in your home to apply for a HELOC.)
3. Consolidating with a personal loan: A personal loan is another debt management solution. You’d use the funds from the loan to pay off your other debts, then make one monthly payment toward your loan. Personal loans tend to have higher interest rates than HELOCs, but it could still be lower than some of your existing debts. Plus, you’d get the peace of mind of making one set payment each month.

Are you ready to tackle your debt?

Getting out of debt can be difficult. What if you could consolidate your debt with one easy payment to pay each month? Check out our home equity line of credit and personal loan offerings to see if either debt solution is a good fit for you.