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Snowballing

Snowballing Definition

Describes a financial method to quickly pay off debt.  The debt holder will compare all debts that he holds, then starting with the debt that is charging the highest interest rate; they will begin attempting to pay down that debt as quickly as they can while only paying the minimum payments on the other debt.  Once they finish paying that debt off they will start paying on the next debt, and so on until all debts have been paid off.


Additional meaning of Snowballing:

An example of Snowballing would be.  Mr. Smith owes on the following debts:

$2,300 at 18% interest with minimum $50 payments for credit card

$8,000 at 4% interest with minimum $100 payments for student Loan

$12,500 at 10% interest with minimum $300 payments for a car loan

Mr. Smith can pay an additional $300 a month to reduce the debt.  So beginning with the credit card (it has the highest interest rate) Mr. Smith will start making payments of $350 to the credit card until it is paid off.  Then Mr. Smith will increase his payments on the car loan (next highest interest rate) with payments of $650 ($300 minimum + $50 that was previously set aside to pay credit cards + $300 extra in monthly payments.).  After the car loan is paid off then Mr. Smith will start paying off the student loans with payments of $750. ($100 minimum + $50 previously used for credit cards + $300 previously used for car loan + $300 in extra monthly payments).


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