Snowball

AAA

DEFINITION of 'Snowball'

A method of efficient debt repayment in which the debtholder initially devotes only enough funds to cover the minimum payments on each debt, after which any remaining available funds from the debt repayment budget are spent on an additional payment to the debt bearing the highest interest rate. Once the debt with the highest interest rate is completely paid for, subsequent extra debt payments go toward the next highest interest-bearing debt. This process continues until all the debts are paid off.

INVESTOPEDIA EXPLAINS 'Snowball'

For example, let's say an individual decides to spend $500 every month on retiring his three sources of debt: $1,000 worth of credit card debt (annual rate of 20% interest), $1,250 of car payments (annual rate of 6% interest) and a $5,000 line of credit (annual rate of 8%). Each has a minimum payment of $50.

If the person decides to use the snowball method of debt repayment, he will spend a total of $150 on paying each debt's minimum payment ($50 x 3). The remaining $350 will be spent on a payment toward the highest interest-bearing debt - in this case, the credit card debt. Once the credit card debt has been completely paid for, the extra payment will go toward retiring the second-highest interest bearing debt (the line of credit), and the loan with the lowest rate of interest (the car loan).

VIDEO

RELATED TERMS
  1. Credit Card

    A card issued by a financial company giving the holder an option ...
  2. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Line Of Credit - LOC

    An arrangement between a financial institution, usually a bank, ...
  5. Budget

    An estimation of the revenue and expenses over a specified future ...
  6. Waterfall Payment

    A type of payment scheme in which higher-tiered creditors receive ...
Related Articles
  1. Credit, Debit And Charge: Sizing Up ...
    Credit & Loans

    Credit, Debit And Charge: Sizing Up ...

  2. How To Reduce Holiday Debt
    Credit & Loans

    How To Reduce Holiday Debt

  3. Take Control Of Your Credit Cards
    Credit & Loans

    Take Control Of Your Credit Cards

  4. Understanding Credit Card Interest
    Retirement

    Understanding Credit Card Interest

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center