Snowballing debts pays them off faster and faster each month – just like a snowball that gets larger as it rolls downhill, picking up more snow.
To snowball you must to be able to pay at least the monthly minimum amounts each month – if you can’t, you need to look at your other debt options.
If you only pay the minimum amounts most of your money goes towards interest and not much towards repaying the debt. So the monthly payments reduce a little bit each month but it takes a long while to clear the debt. You will still be paying for that baby buggy bought with a credit card when your child has left uni!
With snowballing you pick one debt as your top priority and try to overpay that one by as much as possible. When it is clear, you move onto the next target.
As your debts get cleared, more of your monthly payments are clearing the debt itself, not just the interest that is being added. So your debts start to drop faster and faster.
Which debt to overpay?
You aim to pay the minimum amounts off all your debts except one, which you will overpay by as much as possible.
You can either overpay:
- the debt with the highest interest rate – this approach will clear your debts fastest and mean you pay less interest overall; or
- the smallest debt – this can be more satisfying as you decrease the number of your debts faster. It’s a great feeling having cleared a debt and also it makes your life simpler with one fewer payment to have to make
In practice you want an order that feels right for you and means you don’t have to change every payment every month. See Snowballing Examples for some more ideas on what to look at.
There is an interesting debate here about which approach works best, but there is no need to make this over-complicated – any simple plan that is easy to manage is still going to do a good job of clearing your debts.
How long will snowballing take to clear debts?
This can be quite complicated to work out if you have several debts, and of course the time will alter if interest rates change – for example if you can get a 0% balance transfer deal. But it’s good to get an idea of how long you are looking at, so use this Snowball debt calculator.
If you have a good credit record, then you can use 0% Balance transfer offers to speed up your debt snowballing. Have a look at Reduce your Interest for details. Even if your credit record isn’t brilliant at the start, snowballing will improve it as your “credit utilisation” drops. And you will have less debt compared to your income. So you may be more likely to get a blance transfer offer after a while.
Is your budget realistic?
The most common problem with snowballing is when your budget is not realistic for the time it will take to clear your debts. This could be because of hopeless optimism (“I’m not going to buy any clothes for the next 6 years”), because something unexpected happens (redundancy, illness) or because your circumstances will change (retirement, new baby.)
You can’t do much about the genuinely unexpected, but the rest you can try to tackle through better budgeting. It is also possible for nice things to happen – promotion, finding a life partner to live with etc – that will make your snowball get larger faster!
But if a more realistic budget shows that you will struggle to make the minimum payments each month, then you have to make the hard choice between a skinny snowball and a comfy DMP.
How old will you be when your snowball finishes?
The other thing you need to consider is the position you will be in at the end of the snowball.
If you are young, this will normally be fine. But if you are getting near retirement, then you need to think about when the mortgage will be cleared (especially if it is interest-only at the moment) and what your pension arrangements are.
Snowballing is probably still your best option, but if you know you won’t be able to afford your mortgage in retirement, then have a think about your housing options because it may be better to take action now rather than ignore the future problem.
Pros repay all the money you borrowed in the fastest time possible, end up with a great credit rating, no hassle from your creditors
Cons it takes time to clear your debts, you need to keep focussed on your budget
Debt Camel says much the best option if you can repay at least the minimum each month
Want more details?
Debt Camel’s Guide to Snowballing goes into more depth about how to snowball most effectively. How far should you cut back? What about an emergency fund? Your pension? Should you get a consolidation loan? These and a lot more questions are covered.