The Debt Snowball Method: The Best Way to Pay off Credit Card Debt

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Debt snowball

When it comes to paying off credit card debt, it’s easy to feel overwhelmed. A lot of people don't know where or how to start — especially if they have multiple credit cards with different creditors and different balances and at different interest rates.

However, paying off debt is one of the first steps on your journey toward building wealth. On average, American adults carry about $5,673 in credit card debt, and delinquencies (past due payments) are increasing. If you have debt, it's time to pick a payoff plan and get to work. 

Enter the debt snowball method. 

This popular debt payoff strategy has proven to be successful for many people. In this article, I’ll explain exactly what it is and how you can use it to reach your own financial goals and become debt-free.

What is the debt snowball method?

If you have multiple credit card balances, the debt snowball method helps you prioritize paying off your debt by amount. Just like an actual snowball rolling down a hill, the idea is the amount you pay towards each debt accumulates over time, and your debt is paid off faster. It also helps you focus on your payoff plan instead of trying to figure out how much to pay each month.

Here’s a quick breakdown of the debt snowball method:

  1. Focus on the smallest balance first, regardless of the interest rate. 
  2. Pay as much as you can towards that small balance while paying the minimum payment on your larger debts. 
  3. Once the smallest balance is paid off, apply that same payment to the next smallest balance. This is in addition to the minimum payment you were already paying. 
  4. Keep going that way until you’re making a giant snowball payment against your largest debt.
  5. Finally, that debt gets paid off. 

 

Debt snowball method example 

Let's say you have four credit card balances: $4,000, $1,000, $3,000 and $2,000. How do you figure out which one to focus on paying off first? With the debt snowball method, you simply start with the smallest debt first, and so you would order them accordingly:

  • Debt 1: $1,000 ($50 minimum payment)
  • Debt 2: $2,000 ($65 minimum payment)
  • Debt 3: $3,000 ($70 minimum payment)
  • Debt 4: $4,000 ($75 minimum payment)

For the purposes of this example, let's say you have $1,000 to pay towards your debt each month. 

Month 1

In month one, you would pay the minimum payments to debts 2, 3, and 4. However, on debt  1 you would pay the minimum payment PLUS an additional $740. That would look like this:

  • Debt 1: $1,000 ($50 minimum payment) + $740
  • Debt 2: $2,000 ($65 minimum payment)
  • Debt 3: $3,000 ($70 minimum payment)
  • Debt 4: $4,000 ($75 minimum payment)

Total paid towards debt = $1,000

Month 2

By month two, you would have paid off debt 1. However, you’d now be paying the freed up money from debt 1 to debt 2, in addition to the minimum payment. Debts 3 and 4 would still only receive the minimum payment.

  • Debt 1: $1,000 ($50 minimum payment) + $740 PAID OFF!
  • Debt 2: $2,000 ($65 minimum payment) + $50 debt 1 minimum payment + $740 
  • Debt 3: $3,000 ($70 minimum payment)
  • Debt 4: $4,000 ($75 minimum payment)

Total paid towards debt = $1,000

After debt 2 is paid off, you’d then continue paying the minimum payments to debts 3 and 4. Continue to follow this process until you've paid off debt 3 and 4 in full.

Why does the debt snowball method work?

Well, human beings thrive on quick wins and so paying off the smallest balances first regardless of interest rate helps you make quick progress. This motivates you to attack the rest of your debt.

So when you do rewarding things, like pay off debt, your own internal rewards system is triggered and releases dopamine. This feel-good neurotransmitter is responsible for feelings of pleasure and affects your mood, attention, and motivation. 

What about interest with the debt snowball method?

The debt snowball method focuses on debt balances instead of interest rates, so it’s possible you could pay more on interest by going this route. If that’s a concern, you may want to consider the debt avalanche method instead. 

 

Snowball alternative: The debt avalanche method 

You can choose to pay off your credit card debt with the highest interest rates first regardless of the size of the balance. This method is known as the avalanche method. Essentially, this approach will save you money in interest payments. By targeting high-interest debt first, your overall interest payments will most likely be lower.

Let’s say we bring back those same credit card balances from the above example —$4,000, $1,000, $3,000 and $2,000. Let’s give them each an interest rate:

  • $1,000 @ 10% ($50 minimum payment)
  • $2,000 @ 7% ($65 minimum payment)
  • $3,000 @ 8% ($70 minimum payment)
  • $4,000 @ 3% ($75 minimum payment)

Using the avalanche method, you’d prioritize paying off your debt according to interest rate, not the amount of the debt. So if you had $1,000 a month to pay down that debt, here’s what your first month would look like:

Month 1

  • Debt 1: $1,000 @ 10% ($50 minimum payment) + $740
  • Debt 2: $3,000 @ 8% ($70 minimum payment)
  • Debt 3: $2,000 @ 7% ($65 minimum payment)
  • Debt 4: $4,000 @ 3% ($75 minimum payment)

Total paid towards debt = $1,000

Once you’re done with the first highest (Debt 1), rinse and repeat for the second-highest, etc. Apply debt 1’s minimum payment PLUS the $740 toward debt 2, and pay minimums on debts 3 and 4. You’d continue until all of your credit card debt is paid off. 

  • Debt 1: $1,000 @ 10% ($50 minimum payment) + $740 PAID OFF!
  • Debt 2: $3,000 @ 8% ($70 minimum payment) +  $50 debt 1 minimum payment + $740
  • Debt 3: $2,000 @ 7% ($65 minimum payment)
  • Debt 4: $4,000 @ 3% ($75 minimum payment)

Keep in mind, this is the toughest approach because there are no quick wins and you might feel less motivated. That being said, with focus and discipline, this method works and will save you the most amount of money possible in interest payments.

In closing

The most important take away is that when it comes to paying off your debt, you need a plan. I love the snowball method. It has been tried, tested and successfully executed by thousands of people. Whatever you choose, consistency, mindset and surrounding yourself with people who will motivate you to do better is how you will be successful. You just have to decide you are ready and get to work!

{Updated by Cristy S. Lynch}

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