Paying Off Debt – Debt Avalanche vs Debt Snowball

Paying off credit card debt – and debt in general – requires strategy. You can make arbitrary payments across all your open account balances and eventually be debt-free, but having a game plan can save you time and money. If you’re ready to get tactical with your debt, there are two popular methods that you can apply with success: Avalanche and snowball. Each has its pros and cons, but each can also help you pay off what you owe.

As far as which system is best, the answer is the same one you’ll hear for several questions finance-related questions: It depends. Your unique situation, as well as how you view the progress rate when you pay off your debt, will determine which route to take. Before you make that decision, though, you should be familiar with how the avalanche and snowball processes work.

Overview

For both debt avalanche and debt snowball, the approach is the same. You’ll make consistent minimum payments on all your outstanding balances except for one, which will be your focus debt. Ideally, you’ll devote extra funds towards this amount, which is usually either the card account with the highest interest debt or largest balance as the focus of the payoff plan.

The difference lies in the order in which you tackle your debts and whether you want to focus on balance or interest rate. Before you even consider which method to go with, you should take time to list all your current debt, the interest rate for each balance, and the minimum monthly payment you plan to make for each. Doing so will help you stay organized and you’ll have an easier time managing all the numbers in one place.

Debt Snowball

The debt snowball method of debt management focuses on paying your debt in order from the smallest balance to the highest, regardless of the interest rate. Once your focus debt is paid off, you move on to the next smallest amount and repeat the process. It’s a good idea to take the monthly payment amount for your previous focus debt and apply it to your current amount plus any extra money you’re allocating so that you can accelerate the payoff process.

In the above example, we see three credit card balances that need paying off. The debt snowball method prioritizes debts by balance size, so Credit Card #2 would be the best place to start. 

The main appeal of the snowball method is that you’ll see progress quickly. Being able to cross off pesky smaller debt amounts one by one can work wonders for your motivation, therefore, you’re more likely to stay committed to paying off your debt. By the time you reach your last, largest balance, you’ve got plenty of extra dough that you can dedicate to it.

The snowball approach has one glaring drawback, though. You’re ignoring the interest you’re forcibly paying on your other accounts by going after the smallest balance first. If your largest balance also happens to have the largest interest rate, you’ll have paid a considerable amount of interest – that you could have otherwise avoided – by the time you make it your focus debt payoff.

Debt Avalanche

The debt avalanche method focuses on paying your debt from the highest interest rate to the smallest, regardless of the balance. By targeting the largest interest rate first and putting extra money towards its monthly payment, you’re paying less overall interest throughout the life of that debt.

Here is the same credit card debt example from above:

The debt avalanche repayment method prioritizes the highest APR, so Credit Card #2 would be the best place to start, again. This seems strange, as Credit Card #3 has a significantly higher balance. Still, eliminating the higher APR associated with Credit Card #2 is your best bet.

This debt repayment plan is a long-term strategy in which you won’t see immediate results, but it’ll save you money down the road.

Mathematically and rationally, it makes more sense to choose the avalanche method because you save money, and your other balances are unaffected. Aside from making the minimum monthly payments, you’d essentially be ignoring your other balances with either method until it’s time to make each one the focus debt.

Where the avalanche falters isn’t in the strategy itself, however, it’s in the person who employs it. If you’re the type that needs to see frequent, impactful progress, it may be difficult for you to stick with this approach because you’ll only notice its effect when you’ve finished making payments and have calculated how much money you saved overall. Thus, it takes patience and understanding that change is indeed taking place even though you’re not seeing immediate change – albeit from a different perspective.

Choosing a Repayment Method

As we stated earlier, there’s no right or wrong answer when choosing between the snowball or avalanche methods. Here is a quick recap of both methods:

While avalanche is more mathematically sound and can save you from paying more from interest over the course of your repayment strategy, it’s not for everyone. It requires commitment and an understanding of how you’re making a difference in your repayment, even when you don’t see any signs.

The snowball method is more popular because it feels like you’re getting a series of little victories as you pay off the smaller balances first. This can greatly impact your confidence and motivate you to pool together as much extra money as possible to knock out those debts faster. And if you end up paying a bit more interest in exchange for a more positive overall experience, then maybe it’s a worthwhile trade-off.

It’s important to note that you’re not stuck with the strategy you choose. You can always switch between methods if you feel like one or the other isn’t working out at that particular time. If you want to get an idea of how much you’ll be paying with either method and for how long, you can use an online calculator like this one.

Summary

You don’t need to be Dave Ramsey to reduce your high interest debt. Whether you’re Team Snowball or Team Avalanche, paying off your debt won’t free up more money for you. It’ll improve your credit score and make your credit report look more attractive. You’ll also have an easier time getting approved for credit cards or loans in the future – just be careful not to dig yourself into a hole again and be forced to repeat the process.

Related Article: Simple Ways to Cut Credit Card Debt Quickly