Debt Snowball Method: Pros, Cons & How It Works

The debt snowball method is a debt reduction strategy where you list all your debts from the smallest to the biggest amounts. Once you finished the list, you can start settling your small debts so that you can free up more money to pay your larger debts. However, before you decide to use this method in attaining financial freedom, you should first know the pros and cons.

Pros

One of the main advantages of this type of debt reduction method is the positive psychological effect of achieving small triumphs. It is hoped that each small success will drive the debtor to push on and strive harder in settling bigger debts until such time that all debts are settled and paid. Another benefit of the debt snowball method is its simplicity. You do not have to calculate interest rates or use formulas in order to determine which debts to settle first.

Cons

Typically, bigger debts eat up more money because they often have compounding interest charges, so paying for them last would mean spending more on interest or extending the payment periods for all bigger loans. As a consequence, people with low incomes may be at a disadvantage with this debt reduction strategy as their monthly wages may not accommodate huge loan payments.

This method also relies heavily on a person’s self discipline. If you do not use as intended the money that you have freed up by paying off the smaller debts, you might end up getting into a bigger debt problem.