Got Debt? Consider the Snowball Method to Pay it Down Quickly

By Mike Peterson
In January 26, 2013

If one of your goals for 2013 is to pay down your credit cards, it’s hard to go wrong with the “snowball method” of debt repayment.  Chances are, you’ve heard about it before:  it’s a favorite method of finance experts everywhere – and with good reason.  The snowball method is a simple approach that encourages focusing on one credit card at a time.  Through a strategy of prioritizing your debt and gradually increasing your payments, you build up the momentum you need to get down to a zero balance on all of your cards.


It’s a little like what happens when a snowball rolls down a hill – as it moves, it picks up speed and increases in size.  This is what happens to your payments over time when you use the snowball method.


So, how does the snowball method work?  Is it right for you?


It might be easiest to go through a quick example of how this debt repayment strategy works.  Let’s say you have three cards to pay down:


  • Card A is a department store card.  You only got the card because you were making a large-ish purchase and the store was offering a discount for opening a new account.  Your balance is $195 and your interest rate is 15%.  Your minimum monthly payment is $20.


  • Card B is a traditional credit card.  Your outstanding balance is $250, and your interest rate is 20%.  Your minimum monthly payment is $25.


  • Card C is also a traditional credit card.  You $3,500 on it – and because of a few late payments over the years, your interest rate has climbed up to 25%.  Your monthly payment on this card is $120.


Step 1:  Choose a Card to Pay Off First

Which card should you pay off first?  The traditional snowball method dictates that you go from the card with the smallest balance to the card with the largest one.  In cases where you have two cards with about the same amount of debt, you might want to consider paying the one with the higher interest rate first.


Using the information from the above example, I would suggest starting with Card B, the traditional credit card with the $250 balance.  Because Card A and Card B have similar outstanding balances, I decided to compare interest rates instead of just looking at the amount owed.  Card B has a slightly higher balance – but it also has a higher interest rate – so we’ll start there.


Step 2:  Determine Your Payment

Now that we’ve chosen a card to start with, it’s time to decide what you will pay each month.  The minimum monthly payment for Card B is $25.  To start your debt snowball, you will want to review your budget and determine how much extra you can afford to pay in addition to the minimum.


Keep in mind that you don’t want to make your payments so high that you end up completely broke at the end of every pay period.  If you have to use your credit card to cover day-to-day expenses, you’re probably paying too much extra.


Let’s say you’ve determined that you can afford to pay an extra $30 every month toward Card B.  So, every month, your three credit card payments will look like this:


Card A:  $20 (minimum payment)

Card B:  $55 (minimum payment of $25, plus an extra $30)

Card C:  $120 (minimum payment)


Do this every month until Card B is completely paid off.


Step 3:  Move to the Next Card

Now that Card B is paid off, we’ll move on to Card A.  This card has a slightly lower balance than Card B did, and a minimum payment of $20.  We’re going to take the money we were putting toward Card B every month and roll it over, like so:


Card A:  $75 ($20 minimum payment, plus the $55 we were paying on Card 2)

Card B: $0 (paid off)

Card C:  $120 (minimum payment)


Step 4: Keep Rolling

You can probably see where this is going.  Once Card A is paid off, we’re ready to move on to Card C.  To do this, we simply take all of the money that was going to Cards A and B and roll all of it into payments toward Card C:


Card A: $0 (paid off)

Card B: $0 (paid off)

Card C:  $195 ($120 minimum payment, plus the $75 we were paying on Card 1)


As you can see, the snowball method is actually pretty simple.  What I really like about it is that by starting with the smallest debt, you see progress sooner rather than later.  Seeing a zero balance on a card with a smaller outstanding balance can help keep you on track.


Starting Big:  An Alternative to the Traditional Snowball Method

One of the really nice things about the snowball method is that feeling of accomplishment you get from completely paying off one of those smaller cards.  That feeling is often what gives people the motivation necessary to keep going and eventually build up enough momentum to tackle the larger debts.

However, there is a case to be made for starting with the card that has the highest balance and trying to knock that out first.  Obviously, the more you owe on a card, the more you pay in interest in the long run.

Here’s my take on this:  Technically, the account bearing the highest interest will always be the most effective debt to pay off first, regardless of the amount big or small. That said, there could be a psychological effect to pay off a smaller account regardless of the interest in order to begin “snowballing” sooner.  But when you look at the costs, it will always be better to pay off the highest interest first.



So, what do you think?  Have you ever used the snowball method?  Do you think it sounds like a strategy you could stick to?  Do you have any unique strategies for debt repayment?  I’d love to hear about them.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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