“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.
Which debt should you target first?
Which debt should you overpay 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 arguing snowballing works best in practice if you clear the smallest debt first – they call this the Snowball method in contrast to the Avalanche.
But really 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.
Highest Interest or smallest debt? is a debate between two personal finance writers – see which approach would suit you best! 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:
- Is it better to consolidate debt or snowball it?
- Avoid these 5 debt consolidation errors
- Consolidating when you have bad credit.
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:
- 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 it’s harder to get a big credit limit. So try to get one and then plan to pay off that debt. Because you may not be able to get another one when it ends.
- How banks make money from 0% cards (and how to stop them making money from you!)
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.
Other ways to speed up that snowball
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 online
- 7 reasons NOT to grab that sales bargain
- Why Buy Now, Pay Later deals often go so badly wrong.
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!
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. 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. 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.