Debt

GLOSSARY:

• Interest rate
• Debt
• Balance
• Minimum payment

More Terms

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You’re looking at a pile of past-due bills and unpaid debts. The snowball method can help you pay them off, ultimately melting your debt to nothing.

One word of caution: While this method of paying down debt is popular, is supported by some high-profile personal finance experts and ultimately works, it is not the cheapest or fastest way to resolve debt.

Here's how it works.

Make a list of your debts, in order from the one with the smallest balance to the one with the largest. Continue to pay the minimum due on every bill. Don’t go without telephone, electricity, heat or groceries. Don’t unnecessarily add to your debts, either.

Then pick the bill with the smallest balance. If two bills have very similar balances, pick the one with the lowest interest rate, but otherwise pay no attention to interest rates.

Decide how much extra you can put toward paying off your debt every month beyond your minimum payments. Put all the extra toward repaying the smallest bill.

When the smallest bill is paid off, move to the next smallest bill.

Put the first debt’s minimum payment, plus the monthly extra, toward repaying the second smallest debt. Repeat, moving gradually through your list of bills, until all your debts are paid in full.

This plan has several benefits:

• It gives you a firm sense of where to begin paying off your debts. Use this method and you’ll have an organized plan of attack where once there was just a pile of bills.
• It starts at small and builds to big. You start by paying small amounts on your small debts. Then you put all the money that you once paid on your small debts toward repaying your larger debts.
• It rapidly reduces the amount you must pay to lenders in a single month, reducing your financial risk in case of unemployment or emergency.
• It reinforces your resolve with immediate and ongoing results. Paying off debt is a little like dieting. You’re more likely to keep at it when you quickly see that your efforts are having the desired effect. (Supporters point to "quick wins" as the key motivating factor that makes this approach successful.)

Is there a better way? That depends on how you define "better."

If you have the discipline, you can get out of debt faster -- and pay less in interest -- by paying off the debt with the highest interest rate, then the next highest interest rate and so forth.

Use our calculator to determine how much you owe. Then use our roll-down calculator to plot a strategy for repaying high-interest debt first.

Depending on the size of that high-interest debt, though, you may not see a quick reduction in your monthly bills -- and many people need that quick progress in order to stick with a debt-payment program.

If you're thinking about giving the snowball method a shot, be sure to read this success story about a woman who paid off $20,000 in credit card debt.

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