*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
This article was last updated Mar 31, 2016, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on product links. For more information, please see our Advertiser Disclosure
The so-called “snowball” strategy for reducing debt is a popular one, often touted by financial gurus and motivational speakers such as Suze Orman and Dave Ramsey. The approach can be a very effective tool to help you trim down your debt and eventually become completely debt-free. There are also variations on the strategy like the “avalanche” approach, and there are some pitfalls to be avoided when implementing any kind snowball debt reduction plan.
How the Snowball Strategy Works
If you read about different ways for consumers to lower their debt, you will likely encounter terms like snowflake, snowball, and avalanche. All of them are related to a debt-reduction system commonly known as snowballing.
The reason it’s called is that it involves starting small and reducing your debt in progressive, small increments. Over time those little steps will add up to a significant amount of reduced debt. You add enough little nickel, dime, and dollar-sized flakes, in other words, and eventually you have yourself a large snowball of savings.
Instead of attacking a mountain of debt, which can feel like an impossible task and make it seem as though you are never going to get anywhere, go small. It works like this:
1) Identify your smallest debt and repay it first. Then celebrate.
2) Then, move on to the next smallest debt in your pile, and chip away at it until it’s gone.
In this way, you’ll be motivated because you will start to see real results. Your debt will go down, making it even easier to apply the savings you gain from not paying interest on that debt to other debts you have. Research confirms that people who adopt this kind of game plan are more successful at getting completely out of debt than people who don’t use an organized and strategic approach.
The Avalanche Version of the Strategy
High interest rates will snowball on their own, of course, in the unwanted way that can cause a debt you are carrying on your credit card to swell up like a balloon. The longer you carry the debt, the more interest you have to pay on the balance. That’s why sometimes a more effective debt reduction strategy is to prioritize your debt payments not by how large the debts are, but by how high the interest rates are.
Lowering the amount of the balance that you are paying interest on will free up cash that you can use to keep paying off that high-interest balance. Then, once you have gotten rid of that expensive debt – which you can also help to reduce by transferring it to a lower-interest credit card – you can go back and concentrate on applying your snowball method to the smallest debt first.
Pitfalls to Avoid
One of the main reasons that attacking the small debts first is so effective is that you can see bigger results, sooner, which provides a psychological boost to keep you disciplined. Don’t make the mistake of becoming so focused on that success, however, that you start to feel like you are out of the woods and can go back to freely spending.
That happens to many people. They make some progress, then realize they have some available credit and it tempts them to go on a spending spree and use it up. Then they are back where they started. That can be particularly tempting when credit card companies send you offers for cash advances, convenience checks, and other goodies that encourage consumers to spend more.
Another trap you don’t want to fall into is spending away the cash you worked so hard to save by lowering your debt. If you lower a debt and that saves you money on interest, try to use the money only for further debt reduction. Otherwise you will get caught in a vicious cycle where you lower your debts but your household budget keeps getting bigger because you spend the saved cash on items and services it can buy.
The bottom line is that you must hold yourself accountable to your budget and expenses while simultaneously eliminating your debts. Then you’ll wind up really debt-free, faster, and can enjoy the multilayered benefits of a much more stable and stress-free financial life.