The snowball and avalanche methods are two popular strategies to implement when getting out of off debt. One of them focuses on paying off the debt with the lowest balance first, while the other prioritizes paying off the debt with the largest interest rate first.
Here’s how they both work, and how to determine which one makes the most sense for you.
How the debt snowball method works
The debt snowball method requires you to start by listing your debt balances from the smallest to the largest. After making the minimum payments on all of your accounts, you put any remaining money towards the smallest balance. For instance, if you have $500 left on a personal loan and $1,000 left on a credit card, you would prioritize paying off the personal loan first. Then, you move on to the balance with the second-lowest debt, and so on.
The wins compound and feel like a snowball that rolls down a hill and gains momentum.
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How the debt avalanche method works
The debt avalanche method aims to minimize how much interest accumulates on your balances. This strategy prioritizes your debts with the highest interest rates first (again, after you address minimum payments across all accounts). Then, you move on to the debt with the second-highest interest rate, and so on.
A balance with a 20% annual percentage rate (APR) gets prioritized over a balance with a 10% APR. This strategy tends to save more money on interest.
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The debt vs. avalanche method
Assume someone has $20,000 in credit card debt across three cards with the following balances and terms:
- Credit card 1: $5,000 debt at 18% APR
- Credit card 2: $10,000 debt at 22% APR
- Credit card 3: $5,000 debt at 12% APR
The debt snowball method suggests choosing credit card one or three to start. The debt avalanche method suggests focusing first on the second credit card with 22% APR.
While it will take longer to pay off a $10,000 balance than a $5,000 balance, you would likely pay less interest in the long run if you focus on the debt with the highest interest rate. Tackling the debt with the highest APR first could help you get out of debt faster overall.
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Should you choose the snowball or avalanche method?
Regardless of which method you use, it’s important to list your debt balances and rates. That will give you a full overview of your financial situation and help you track progress. Minimum payments are a good starting point, but you will pay off debt faster if you make more than the minimum payment.
The debt snowball method may make sense for people who need extra motivation to pay off debt and want to see small wins accumulate. However, the debt avalanche approach can typically save you more money, and maybe more time.
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