“Snowballing your debts” is the name given to paying the minimum off all debts except one, and overpaying that one by as much as possible each month.
Why is this called “snowballing”? A snowball gets larger and faster as it rolls downhill. Clearing debt may seem to go slowly at the start, but like a snowball it will get 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 less interest to pay, so if you make exactly the same payment as before your over-payment will be larger. Your “snowball” gets bigger each month and your debts drops by more.
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 and what to be careful about;
- see relevant news items.
For an overview of snowballing and how it works, start with:
Which debt should you overpay first? Opinion is divided about this, with the financially best approach being the highest interest debt but many people arguing snowballing works best in practice if you clear the smallest debt first. Highest Interest or smallest debt? is a debate between two personal finance writers – see which approach would suit you best!
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:
- Is it better to consolidate debt or snowball it?
- Avoid these 5 debt consolidation errors
- Debt consolidation – how a Credit Union helped
- Consolidate debt before getting a mortgage?
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. See:
- The best 0% balance transfer deals First published in 2016, I update this every month where there are changes.
- How banks make money from 0% cards (and how to stop them making money from you!)
Other suggestions that can help you to snowball better, or to avoid problems, include:
- Overdrafts – a hard type of debt to clear
- Save an emergency fund or pay off debts?
- 5 ways to reduce the amount you spend on line
- 7 reasons not to grab that sales bargain
- Why Buy Now, Pay Later deals often go so badly wrong
- Why (and how) you should reclaim PPI.
How long will this take?
To see how long it will take to clear your debts use this Snowball Calculator – it can’t be 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, finding 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!
One of the best things about Snowballing is that it will improve your credit rating as your debts start to decrease and you get a consistent set of “on time” markers each month. This makes it more likely you will be able to get a 0% balance transfer deal, which will speed up your debt repayment even more.
But if this seems to be taking forever, read Getting through “the slog”
Are your debts too big to snowball?
If you can’t afford the minimum payments to your debts 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:
If your debts keep going up, this is unsustainable. Look at your other debt options – none of them may sound great, but if you leave it a few months or a year, your debts will be larger and even harder to deal with. Be realistic about whether you could make some cutbacks or earn more money – see Improve your finances above – 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.