“Snowballing your debts” is the name given to paying the minimum off all your debts except one, and overpaying that one by as much as possible each month.
This Guide to Snowballing provides information and tips so you can:
- decide if snowballing is your best approach;
- find out how to speed it up;
- know what to look out for and what to be careful about.
Why is it called “snowballing”?
Roll a snowball downhill and it picks up more snow and goes faster.
Think of the amount you overpay in the first month as your snowball – much of this is paying interest, but it clears a bit of capital.
The next month there will be a bitless interest to pay, so if you make the same payment as before your over-payment will be larger and you clear a larger amount of capital.
So your “snowball” gets bigger each month and your debt drops by more. Like a snowball, your debt clearance get faster and faster
You can’t snowball unless you can pay at least the minimums each month
If your debts are too big, snowballing isn’t going to work for you.
Even if you are making the monthly payments, you still have problems if your debts aren’t dropping. You may be using credit to make debt payments – that isn’t clearing debt, it’s just shuffling it around.
If your debts keep going up, this is unsustainable.
Be realistic about whether you could make some cutbacks or earn more money. If the answer is “not enough to make much of a difference”, then you may need a debt management plan to freeze interest. Or even insolvency for a fresh start.
Which debt should you target first?
Opinion is divided about this!
Financially best approach is to repay the highest interest debt, as this reduces the amount of interest you have to pay – this is sometimes called the Avalanche method.
But many people say snowballing works best in practice if you clear the smallest debt first – they call this the Snowball method in contrast to the Avalanch method.
These are both just variations on the overall snowballing idea which is that you pay the minimum to everything and targe one debt to clear first.
Here is a short BBC video where one woman described how paying off the smallest debt worked better psychologically for her – illustrated with different size cakes,
You don’t have to adopt one approach and stick to it – every time you clear a debt you can decide which you want to target next.
Also you may have personal reasons for wanting to get rid of a particular debt first. That could be a loan from a relative. Even though it’s interest- free, you will just feel so much happier when it is gone!
Tips for better snowballing
Many of the best ways to make that snowball get larger and roll faster involve improving your finances: save money, increase your income, pay less interest, smarter budgeting etc.
Could consolidating your debts help? Possibly… but you may not be able to get the loan you want… and if you do it could be a disaster:
0% balance transfers
If you have a good credit record, then a 0% balance transfer deal could be even cheaper than a cheap bank loan.
It’s harder to get good balance transfer deals in 2021. There are still some good deals, but they are shorter with higher fees and often lower credit limits. So try to get one and then plan to pay off that debt before the offer ends.
If you get one, you must make sure you never miss a payment to it – otherwise the 0% deal is very likely to be cancelled and you are back paying high interest again. Worst of all, with that missed payment on your credit record you will find it much harder to get another 0% offer. So one small slip can cost you a lot.
Avoid Klarna and other Buy Now Pay Later offers
If you are trying to get out of debt as fast as possible, Klarna and similar ways to spread the cost over a few weeks may sound convenient. But they are a big trap.
It doesn’t feel like you are spending real money, so there is a temptation to buy more than the sensible you really wants. And if you have done it a few times it can be hard to track what you have to repay every week and every month.
Other ways to speed up that snowball
Not buying things doesn’t have to feel like deprivation Look out for the eco positives – buy fewer clothes, eat more vegan food, save the planet and save money at the same time!
Do make sure your partner is on board.
Look at these ideas for a Money Detox.
How long will this take?
To see how long it will take to clear your debts use this Snowball Calculator.
It’s not exact as you are unlikely to make the same debt repayment every month, but it is a good start. When using it, tick the “Overpay” box for credit cards, catalogues and if you have any loans which are flexible – most loans aren’t.
The Calculator assumes that when a 0% offer ends, you will then pay the higher rate. But if you can transfer the debt again you may be able to repay the debt faster than the Calculator suggests.
How far to cut back? is a question many people find hard. It’s tricky to find the balance between clearing the debt as fast as possible and having a budget you can live on for a long while.
Try running the Snowball Calculator with a larger monthly payment and see how much quicker you will get out of debt if you cancel that gym membership and halve your takeaway expenditure!
And if this seems to be taking forever, read Getting through “the slog”
Your credit rating will improve – and that can speed things up
One of the best things about Snowballing is that it will improve your credit rating as your debts start to decrease. This helps your credit score in two ways. First you get a consistent set of “paid on time” markers each month. And second, your “credit utilisation” on credit cards and catalogue accounts drops.
A good credit record makes it more likely you will be able to get a 0% balance transfer deal, which will speed up your debt repayment even more.
This is another way your snowballing can get faster.
Borrowing more and paying more interest gets someone into a debt spiral. But debt repayments every month gets you into a virtuous, upward spiral. So if things seem to be going a bit slowly at the start, remember, this really does get better.
If you have a bad month – just keep going!
Not many people will clear a pile of debt with no set backs along the way. I love the cartoon of “The universe’s plan for you” in Has your budgeting gone off track?
If every month seems to be a bad month, then probably your budget is too tight. But the odd problem, you just need to not let it get you down and carry on.