Debt Snowball

Full definition

The debt snowball was popularized by personal finance educator Dave Ramsey and has substantial real-world success, particularly for borrowers who have struggled to maintain consistent repayment habits. How it works: List all debts by balance, smallest to largest. Make minimum payments on all accounts every month. Direct all extra money toward the smallest balance. When that debt is paid off, add its entire former minimum payment to the minimum payment on the next-smallest balance. Repeat until all debts are cleared. Why it works psychologically: Paying off a small debt completely delivers a clear, tangible victory. That sense of progress is motivating. Research in behavioral economics (notably by Kellogg professor David Gal and Blakeley McShane) shows that eliminating individual accounts - not just reducing balances - is particularly motivating for debtors and increases the probability of sticking with a repayment plan. Cost vs. avalanche: The snowball typically costs more in total interest than the debt avalanche because you may carry high-rate balances longer. The difference can be hundreds or thousands of dollars depending on the balances and rates involved. For someone who previously failed at debt payoff, the higher cost may be worth the improved consistency. When to use snowball: If you have several small debts with manageable interest rates, the snowball's efficiency penalty is small. If you are returning to debt repayment after previous failures, the quick wins may help you build lasting habits. If all your debts have similar rates, the snowball and avalanche produce nearly identical results. Hybrid approach: Some borrowers target a small, quickly payable balance first for an initial win, then switch to highest-rate-first targeting. This hybrid approach can balance motivation and mathematical efficiency.

• Debt Avalanche
• Debt Consolidation Loan
• Minimum payment
• Debt-to-income ratio (DTI)