Crunching the Numbers for the Snowball Method

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The Snowball Method is considered one of the best ways to pay back debt in the modern world. With this option, you start by paying off your lowest debt and then progress upward until your largest debt is paid. The theory behind this is that paying off small debts will give you enough encouragement to continue the process with larger debts. That is why it works so well.

For the longest time, people have talked about the costliness of the Snowball Method, assuming that leaving higher debts to the end would rack up more interest charges in the long run. We have even mentioned it to some of our visitors, claiming the exact same thing. When I went to develop a chart to illustrate this though, I was surprised by the results. It turns out the Snowball Method may actually save you money in the long run.

How is that possible? It defies all logic! I agree, but the numbers don't lie. Take a look at the study I did to prove the extra value of the Snowball Method of debt repayment.

How the Snowball Method Works

The Snowball Method works by slowly building the amount of debt you have to pay off. Snowball methodRather than paying on one debt for forever and eventually losing desire to have it paid, you pay on the small accounts first to get them out of the way.  Then you may only be left with one or two payments to make, rather than 10 or 20. The goal here is to keep you motivated about your repayment for the whole process so that you can get out of debt faster.

The vast majority of the people that use this method only do so to boost their morale. What they don't realize is how many other ways they are helping themselves through debt. If you want to see just how well this process works, keep reading. I'll show you the numbers to prove it.

What I Did to Test It

In order to see how effective the Snowball Method was, I looked at the time and interest needed to pay off three credit cards, valued at $1,000, $5,000, and $10,000. I ran the numbers with the Snowball Method and with the "Reverse Snowball," as I call it. (Anti-Snowball seemed a bit harsh.)

Credit CardsI assumed that while a person was paying off one credit card, he or she would be making minimum payments on the others. Obviously this may not always be the case, but I'm looking at this from the perspective of someone trying to maintain his or her credit while getting out of debt. If you were to choose to just pay on one card without thinking about the others, the Snowball Method would indeed cost more to complete. You're just going to have to spend a long time rebuilding your credit if you go with that option.

For all three credit cards, I assumed a 10% APR and a 2% minimum payment. When the person in the study is paying off a card, he or she is making payments of $200 (the initial minimum on the $10,000 loan. Again, changes in interest and minimum payments could make big differences in this study. I simply weeded out any underlying variables.

To calculate the minimum payments, I figured out what 2% of the remaining balance was every month. I used the Compare Cards payoff calculator to see how long it would take to pay off a loan and what the interest rates were along the way. While one card was being paid off, I found what the remaining balances were for the other cards after minimum payments. Then I used whatever was left to do a new round of calculations with $200 payments.

What I Found

interest paidThe charts here indicate what I found in my analysis. As you can see, the Snowball Method cost more for one of the credit cards, but its total costs were a lot less than those of the Reverse Snowball. There was also a 5 month difference in the amount of time it took to pay off all the cards, with the Snowball Method taking less time overall. Long story short, it took less time and less money to pay off debts with the Snowball Method. This may be better than people give it credit for!

Payoff PeriodOf course, you can use the Snowball Method purely to keep yourself excited about paying on your debts. With these charts though, you can see that you'll actually be getting out of debt quicker with this approach. I encourage you to crunch the numbers for your situation, just to make sure that you will in fact be able to get something out of this. Your APR, credit card balances, and ability to make payments on multiple cards will all factor into determining how effective this is for you.

Other Payment Options

If you cannot get any benefits out of the Snowball Method, you may want to consider debt consolidation. This will leave you with one payment to make a month, often with a low interest rate than what you had before. You can either take out a loan for your debts, or you can transfer their balances to one credit card. There are many balance transfer credit cards on the market to help you do just that.

In an absolute worst case scenario, you can talk to a lawyer about filing for bankruptcy. This will clear most of your debts, but it will destroy your credit for seven years to follow. No matter how far you are in debt though, feel confident that there is a solution for you. In one way or another, you'll be able to restore your financial freedom soon enough.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.

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