Is The Snowball Debt Repayment Approach Right For You?

Posted on: 2 December 2015

While most people want to pay off their debts, experts sometimes disagree on the best way to go about the task. While some financial planners believe you should target the debts with the highest rates of interest first, other advisors are advocates of the snowball debt repayment approach. Learn more about how the snowball approach works, and find out if this method is right for you.

The principles of snowball debt repayments

It's often difficult for people in debt to know where and how they should start to tackle the problem. Daunted by large, multiple debts, some people's problems spiral out of control because they simply don't know in which order they should tackle their repayments.

The snowball debt repayment method acknowledges that it's difficult and stressful to pay off the money you owe, especially over a long period. What's more, if people don't feel as though they are seeing any progress, it's easy to give up, so the snowball approach prioritizes the smaller debts first to gradually increase the debtor's confidence.

As you might expect, the snowball name refers to the fact that your repayments gradually gather momentum, rather like a ball of snow rolling down a hill. If you start small, your work will soon reap benefits, and some experts believe that this approach actually leads to better long-term results.

Evidence and research

Research suggests that the snowball method may lead to more productive results. In one study, a group of researchers examined the approach to debt taken by 6,000 people with credit card debts. The analysis showed that the consumers who experienced regular, small repayment 'victories' were actually more likely to pay off their entire debt.

The approach

Like any other approach to debt management, you'll still need a plan if you want to try the snowball method. List your debts by the size of the outstanding balance, and target your repayments at the smallest debts first. Crucially, the smaller debts may not cost you the most money in interest, but the victory of paying this off quickly should spur you on to tackle the larger debts.

Of course, you'll still need to carefully plan your finances. No approach to debt management will work if you don't cut back on your spending.

Potential pitfalls

The snowball approach doesn't always work, and some people find that they still need to consider debt consolidation and/or other repayment methods to get their finances under control.

The snowball method sometimes encourages bad habits. A small, simple financial victory can easily lure somebody into spending money as a reward, when, in fact, all your spare cash should go towards the next debt. As such, before you adopt the snowball method, you need to decide if you have the willpower to make this approach work over the long-term.

It's also important to make sure you consider exactly how much this method will cost you until your debts are gone. Use an online calculator to work out the total amount you will pay if you order your repayments in this way. If the sum is significant, you may need to consider a different structure to your debt repayments. For example, if you're going to pay an extra $2,000 in interest over two years to get rid of your debts in this way, you may want to think about a different approach to prioritization.

The snowball method is also dangerous if you don't close down your credit options as you pay them off. Even if you have a lot of willpower, it's easy to let a credit card balance build up again after you have paid the money off. Close down credit card accounts and other lending options as you pay them off, as this will make sure your debts don't get out of hand again.

The snowball approach is an increasing popular way for Americans to manage their debts. Carefully consider the pros and cons of this repayment method, and make sure this approach is right for you, or you may never resolve your debt issues. For more information about the snowball approach and other methods for loans consider talking with financing professionals or find out more here.