The Debt Snowball Method Explained

Get Out Of Debt Strategy Series

The debt snowball is a popular method of debt repayment that Dave Ramsey made famous. It essentially is when you list your debtors and the balances from smallest to largest (not including your mortgage). You live on your budget that you have built out, and commit to allocating all remaining funds to the smallest debt until it is paid off. All the other debts receive the minimum monthly amounts.

Dave Ramsey explains using the Debt Snowball

Some will argue that the emotional wins of the debt snowball do not outweigh the logical gains of paying off the highest interest rate (via the debt avalanche method).  The debt avalanche basically is when you pay off your debts, regardless of balance, from highest interest rate to lowest interest rate. I personally have felt energized after the small wins of paying off smaller, seemingly manageable debts. No matter if it’s an insurmountable student loan, or a credit card that has spiraled out of control, it can feel frustrating if you start making large payments and don’t see the balance drop to zero fast enough.

An example of the debt snowball

Here is a real life example of the debt snowball method. I had two credit cards with balances of $780 and $1503 respectively. The interest rates on both cards were 0 percent (introductory 12 months) and 24.99 percent. The next largest balance was an $2600 installment loan at 12.99 percent and then a $4000 credit card at 29.99 percent.

Stacking those up, it looks something like this:

Balance                Interest Rate

$780                     0.00

$1503                   24.99

$2600                   12.99

$4000                   29.99

I paid off the $780 credit card (a store card for a pair of tires) and closed that card after the statement reflecting a zero balance cut. My thought process there was two-fold:

  • I am no longer in the business of store branded credit cards, and have committed not to fall for the silly promotions that companies try to lure you at the register, and…
  •  I committed to paying for purchases by debit card/cash until I eliminated all of my non-real estate debt.

Had I followed the debt avalanche method, that $780 would have been allotted to the $4,000 balance credit card at 29.99, while I would have made just the small $30.00 minimum payment on the $780.00. Personally, that didn’t work for me. While I know some will argue the debt snowball ends up costing you more interest over time, my counter-argument is if you truly understand the debt snowball, and are committed to seeing it through, you will accomplish more and see it through to the end.

I ended up paying all four balances off (and closed all four accounts) over the course of 5 months. My FICO score saw a small increase after everything reported, and while I was not primarily focused on what my credit score would be after closing, the feeling of accomplishment helped me focus on plowing through the remaining three larger debts (auto loan, credit card, student loan).

Is the Debt Snowball the right plan for you?

Only you can answer that question. You read that in my personal situation, I not only paid off the balances, but closed the accounts in question. That was my decision when I committed to the payoff plan, as I envisioned living debt-free with exception of my mortgage in a defined timeline, and on the other side of the debt mountain I was climbing was one surviving credit card (my oldest card and largest tradeline – a Visa issued by my credit union) and one rewards card (Amex Hilton). I will carry no balances on those and have enough revolving credit for me ($25K between the two cards) to purchase virtually anything I could ever reasonably justify to buy.

What are your thoughts on the debt snowball method? Have you used it, or some variation? Do you believe it is more beneficial than the debt avalanche. Drop a comment and let us know.

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