What does the term “debt snowball” mean?

The term “debt snowball” refers to a specific strategy for debt reduction that focuses on paying off the smallest debts first. This approach is designed to build momentum as consumers eliminate their smallest debts, leading to quick wins that can motivate them to tackle larger debts over time. The idea is that by paying off smaller debts quickly, individuals gain a sense of accomplishment and confidence, which encourages them to continue the process and ultimately pay off all their debts.

This strategy operates on the principle that addressing smaller debts first can reduce the number of outstanding obligations and simplify financial management. As smaller debts are paid off, the funds that were allocated to those debts can then be redirected toward larger debts, effectively creating a “snowball” effect where the amount and power of payments increase as debts are eliminated.

In contrast, other methods such as paying off the largest debts first may not provide the same immediate psychological boosts that come from quickly eliminating smaller debts. Thus, the debt snowball technique leverages behavioral factors in financial management, making it an effective approach for many individuals seeking to regain control over their debt.