Debt snowball

A payoff strategy that makes minimum payments on every debt and puts all extra money toward the smallest balance first.

What it means

With the snowball method, debts are ranked by balance from smallest to largest, regardless of rate. Extra money goes to the smallest debt until it is gone; then its payment rolls into the next-smallest, so the amount aimed at each debt grows like a rolling snowball.

The quick early payoffs can build motivation and reduce the number of bills fast. The tradeoff is that it can cost more interest than the avalanche method when larger debts carry higher rates. Which approach works better often comes down to whether math or momentum keeps a person on track.

Example

Using the same debts, a $1,000 card at 18%, a $3,000 card at 24% and an $8,000 car loan at 6%, the snowball targets the $1,000 card first. Paying $335 a month on it (a $35 minimum plus $300 extra) clears it in the fourth month.

How it’s used

People who need visible progress to stay motivated
Reducing the number of separate bills quickly
Debts with similar interest rates

Strengths and weaknesses

Strengths

Fast early wins build momentum
Fewer accounts to track sooner
Easy to understand and follow

Weaknesses

Can cost more interest than the avalanche
May leave high-rate debts growing longer
Overall payoff can take more time

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.