Study suggests snowball debt plan works

Monday, August 20th, 2012 By

Snowball

A study, by researchers from Kellogg University, has found the “snowball” debt reduction method does work. Image from Wikimedia Commons.

Many people have likely heard of the “snowball” debt method, a debt reduction strategy which emphasizes results-based reinforcements. A study was recently released that indicates there is some merit to it.

Sound thinking of snowball debt method

A few people might have heard of the “snowball” debt method. It’s widely touted by a number of personal finance experts, perhaps most notably by Dave Ramsey.

The idea is to reinforce debt reduction through positive results. Essentially, one gathers all their debts together, listing them from smallest to largest amounts. They make minimum payments on all debts, be it credit cards, mortgage or other installment loans, but kicks a bit extra toward the smallest debt. That smaller debt gets paid off faster.

Once paid off, they pay extra on the next largest debt and so on, until the last debt is paid off. The last debt will be paid off quickly, as the cumulative effect of all debts being gone will have “snowballed” into a payment much larger than the minimum. The idea is that the small debts getting paid off shows the person it’s possible and they are encouraged to keep at it.

Study says

A recently-released study from Kellogg University, according to the Huffington Post, confirms that the snowball debt method actually works. The study is appearing in the “Journal of Marketing Research.” The researchers examined account activity at a debt management company, and found people using the snowball method were able to close more open debts than those who stuck to the more traditional method of paying off the debt with the highest interest rate first.

Despite personal finance being a large part of a person’s day-to-day life, there isn’t a wealth of studies on which debt reduction method works the best. Perhaps the only other is one that found the debt snowball method didn’t work well at reducing debt overall. According to BusinessInsider, that study was done by Dr. Scott Rick at the University of Michigan, and it found that despite the “victories” of the snowball method, it didn’t reduce high interest debts as well as the traditional method of paying the highest interest rate debt first.

Interesting

That study essentially threw the most constant criticism of the snowball debt reduction method at it, which is namely that debts with higher interest rates will accrue more in interest while the smaller debts are paid off.

Proponents have acknowledged that this is obviously possible, but, according to Time magazine, as Ramsey puts it, if a person doesn’t have some sort of “quick wins” to point to, the motivation to keep up with it just isn’t as strong.

When it comes to whether or not the snowball debt method works, really it comes down to personal experience. There are plenty of success stories out there, but one imagines there are also some failures. Has any particular debt reduction strategy worked for you?

Sources

Huffington Post

BusinessInsider

Time

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