Snowballing is a technique used to pay off multiple debts. It only works if you are able to make the minimum payments on all your debts, and you have a little bit extra that you can throw at them.

The theory of Snowballing is to pay your debts off in a specific order – the debt with the highest interest rate should always be paid off first. All debts should have their minimum payments made and then any other money you have spare should be used to pay off the debt with the highest interest rate. This is the most effective rate of paying off the money you owe. Although it may seem better to pay off the debts with the smaller balances first as it seems as though you are paying off your debt quicker, you will in fact be paying more overall than if you Snowball.

Here is an example:

Amount Owed   APR     Min. Payment
CC1: £1,000       22%         £ 50
CC2: £5,000       12%         £150
CC3: £9,000        6%          £250
CC4: £5,000        5%          £100
TOTALS: £20,000               £550

It would take years to pay off these debts if just the minimum payment was paid each month.
Let’s say that you have an extra £200 per month that you can throw at these debts. You should start paying the highest interest debt first – that’s the one with the 22% APR. So £250 goes towards this debt each month and the other three debts have just their minimum payments met. CC1 will then be cleared in 5 months. [Note that as you pay each card off, the minimum payment will decrease. Do not be fooled by this - make sure you still continue to put your money towards this debt as it still has the highest APR and will therefore accumulate the most interest].

This means that you will have an extra £250 per month to throw at the next debt – CC2. This means you will be able to pay £400 per month towards this debt (the £250 you were paying towards CC1 which is now clear, plus the £150 you were already paying towards CC2). Once this has been paid off, you will then be able to throw £650 per month at CC3 and so on.

Because you are paying off the highest rates first, and the putting a lot of money towards the smaller APR cards, you will be saving yourself a lot of interest charges and you will also be debt-free in a much shorter space of time. From the calculations above you can see why this technique is known as the snowball – the more you pay off, the larger your ‘snowball’ gets!

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