Confirmed: Snowball is more effective

[Gunnar419]

After all the MyFico debate over snowball vs. paying higher interest debt first, Harvard researchers have confirmed: snowball works best.

http://www.businessinsider.com/spreadsheet-snowball-method-pay-off-debt-2017-2

From the article:

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And while there are many strategies to eliminate debt for good, one method proves most effective: Prioritizing accounts with smaller balances, rather than those with higher interest rates, also known as the snowball plan.

That's according to new research from the Harvard Business Review. After conducting a series of experiments in which participants simulated paying back virtual 'debts,' researchers concluded that the factor that made the biggest impact on how hard participants worked wasn't the amount they were paying back or how much was left in the account afterward, it was the percentage of the balance they ended up getting rid of.

Although it makes more sense mathematically to pay down accounts that carry the highest interest rates first, they found that it was more motivating for participants to see small balances disappear.

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[Anonymous]

Thanks Gunnar!  Funny you should post this.  I pretty much said the same thing yesterday in a thread where the OP needed practical advice on which order he should tackle his debt.

I laid out the two approaches (Snowball vs. High Interest First) and gave the pros and cons.  (Actually SouthJ laid out Snowball really well and then I dovetailed on what he said.)  I emphasized the way that the Snowball method is often better at giving regular emotional reinforcement (in the form of zeroing out cards) and how that reinforcement might well be the difference between success and failure for the large scale enterprise of paying off a mountain of debt.

But I also pointed out that mathematically the High Interest First (HIF) approach gets you out of debt quicker -- if you do not need the emotional reinforcement.

My advice was that choosing between the two boiled down to emotional temperament, but also between whether your interest rates are largely the same vs. possibly very different.  If you have one or more cards with a much higher interest rate than the others, that is an argument in favor of the HIF approach (but again taking your emotional temperature into account too).

So I still think there isn't a single answer to "which is better" -- but this article helps lay out the case for why the emotional reinforcement can be so crucial in the SM.  Thanks for sharing.

[Gunnar419]

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@Anonymous wrote:

My advice was that choosing between the two boiled down to emotional temperament, but also between whether your interest rates are largely the same vs. possibly very different.  If you have one or more cards with a much higher interest rate than the others, that is an argument in favor of the HIF approach (but again taking your emotional temperature into account too).

So I still think there isn't a single answer to "which is better" -- but this article helps lay out the case for why the emotional reinforcement can be so crucial in the SM.  Thanks for sharing.

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Very true, CreditGuy. If you've got a debt with a hugely higher interest rate than the rest, paying high interest first could be the right way to go. Good explanation.

The new Harvard study only confirms that under most debt paying circumstances, motivation beats math.

[thom02099]

Interesting information.  The emotional vs the pragmatist type person when it comes to response to decreasing debt.

The hard part?  Determining which one a person really is.  One has to take a critical look inward to determine what would work best for their particular situation. While I think I'm usually pragmatic, that emotional part of me does come out, when I see in my xcel spreadsheet a bunch of zeros in balances.  I've actually used both approaches in the past 40+ years of managing credit, and I find that, at this point in my life, the snowball/emotional side is winning out.  Though I'm not carrying a lot of debt, it's more than I want at this point, so the snowball approach is working better for me.  But that's just me.  Each person has to really look inward and be honest with themselves, to determine which approach would work better...for them.