Debt Snowball
BeginnerThe debt snowball is a debt repayment method in which you pay off your smallest debt first while making minimum payments on the rest, then roll that payment into the next smallest debt.
With the debt snowball, debts are listed from the smallest balance to the largest, regardless of interest rate. Every spare amount goes to the smallest debt until it is gone. Then the money that was going to it is added to the payment on the next smallest, so the payment grows like a rolling snowball.
Suppose you owe 600 on a store card, 2,500 on a credit card and 8,000 on a car loan, and you can pay 300 a month above the minimums. You put the extra 300 towards the 600 balance and clear it in about two months. Then you add that freed-up payment to the 2,500 balance, and so on.
The strength of the snowball is psychological. Clearing a debt quickly gives a sense of progress and motivation, which helps many people stick with the plan.
Its weakness is cost. Because it ignores interest rates, you may pay more interest overall than with the debt avalanche, which targets the highest-rate debt first. The best method is often the one a person will actually follow through on.
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