The debt snowball method is a debt-reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next larger debt, and so forth, proceeding to the largest ones last. This method is sometimes contrasted with the debt stacking method, also called the debt avalanche method, where one pays off accounts on the highest interest rate first.

The debt snowball method 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.

Methodology

The basic steps in the debt snowball method are:

  1. 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.
  2. Commit to pay the minimum payment on every debt.
  3. Determine how much extra can be applied towards the smallest debt.
  4. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off. Note that some lenders (mortgage lenders, car companies) will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction. Credit cards usually apply the whole payment during the current cycle.
  5. 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 the second smallest debt.
  6. 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, hence the name.

The theory appeals to 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.

Pros and cons

In either method, fixing the cause of the debt (this does not include one's home loan) must be addressed, that is balance of income vs spending. A 2016 study in Harvard Business Review came to a similar conclusion:

Author and radio host Dave Ramsey, a proponent of the debt snowball method, concedes that an analysis of the subject from a purely mathematical and interest rate perspective leans toward paying the highest interest debt first. However, Ramsey also states his opinion that personal finance is "20 percent head knowledge and 80 percent behavior" and he argues people trying to reduce debt often need "quick wins" (i.e., paying off the smallest debt) in order to remain motivated toward debt reduction. Ramsey Solutions has done internal studies which found debt snowball method tends to be more effective in real-world situations.

Research by Moty Amar and colleagues agreed that debtors are inclined to pay small debts first, which they attributed to "debt account aversion", i.e., the desire to reduce the number of outstanding debts regardless of balance or interest expense and focus on a "tangible sense of progress". However, they also found when debtors in a laboratory simulation are restricted from paying off small debts in full, and are instead shown the interest that will accrue as a result of their choice, they tend to make the mathematically optimal decision.

A 2023 paper by Nurazleena Ismail and Hilmiah Ahmad stated both avalanche and snowball methods have their merits and shortcomings, and also noted reducing unwanted debt levels had cognitive elements that can be as important as mathematical analysis. The authors cited nudge theory to argue individual personality traits must be considered and there is no ideal debt payment method that will work for everyone in all scenarios.

See also

  • Personal finance
  • Alternative financial service
  • Debt consolidation
  • Debt management plan

References