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Methods For Paying Off Debt: Snowball vs. Avalanche

by:
Cathy Plowman

Debt can build up seemingly overnight. Unfortunately, without some sort of financial windfall, debt can’t be paid off overnight. Becoming debt-free takes time and effort, but there are two ways you can do it: The snowball method and the avalanche method. (Both methods assume you owe money to multiple lenders, but if you are in debt with just one lender, focus on paying them as much as possible and as quickly as possible to avoid paying unnecessary interest charges.) There are pros and cons to both the snowball and avalanche approach, so here’s everything you need to know about these two debt repayment strategies, with examples to boot!

The Snowball Method

Remember making snowballs as a kid? You would first pack a small ball of snow in your hands, and sometimes, if you were lucky enough to be on a hill, you'd let the snowball roll down watching it gather snow along the way until it became a giant snow boulder. Well, that's how the snowball method for repaying debt kind of works.

It involves paying as much money as possible towards your smallest debt, regardless of the interest rate, while maintaining just the minimum payments on your other debts. Once the smallest debt has been paid off, you roll the money you were paying towards that debt into your payment towards your next smallest debt. And once that one is paid off, you roll that money onto the next one, and so on. This way, you continue to increase the amount you’re paying towards your smallest debts, knocking them off one by one, because your payments “snowball” into faster debt repayment.

For example, in the table below are four hypothetical debts listed, from smallest balance to largest. Using the snowball method for debt repayment, you would repay these debts in this order, again, while still maintaining your minimum payments on all. 

DEBT BALANCE MINIMUM PAYMENT INTEREST RATE
Credit Card #1 $500 $20 12.5%
Car Loan $3,000 $100 6.5%
Credit Card #2 $5,500 $150 17%
Student Loan $10,000 $180 4.5%

So you would focus on putting as much money as you can towards paying off Credit Card #1 while still paying $100 towards the car loan, $150 towards Credit Card #2 and $180 towards the student loan. But let's say instead of paying just the minimum monthly payment of $20 on Credit Card #1 you can actually pay $40 every month. Once it's paid off in full, you focus on tackling the car loan, but this time instead of just paying $100 every month you add the money you were putting towards Credit Card #1 ($40). So now your monthly payment on your car loan is $140, and once that's been paid off in full you add $140 to the next smallest debt, and so on and so forth.

The Avalanche Method

You may be thinking, doesn’t it make more sense to pay down debt with the highest interest rate first? Well, that’s what’s known as the avalanche method for debt repayment.

Also known as debt stacking, the avalanche method involves maintaining the minimum on all of your debts, but paying the most money you can towards the debt with the highest interest rate first, regardless of how much money is owed. While it might take longer to eliminate your first debt based on how high the balance is, in the long-run you're likely to save hundreds, if not thousands of dollars in interest charges.

Following the avalanche method for debt repayment, you would repay your debts in the following order, while of course, maintaining your minimum payments on all:

DEBT BALANCE MINIMUM PAYMENT INTEREST RATE
Credit Card #2 $5,500 $150 17%
Credit Card #1 $500 $20 12.5%
Car Loan $3,000 $100 6.5%
Student Loan $10,000 $180 4.5%

And just like in the snowball method where you add the monthly payment of the debt you just finished paying off to the next debt you tackle, you do the same in the avalanche method. They call it the avalanche method because your efforts are compounded by the money you're saving in interest, so your debt gets smaller while your payments get larger. 

In this scenario, you would put as much money as you can towards paying off Credit Card #2 while still paying $20 towards Credit Card #1, $100 towards the car loan and $180 towards the student loan. But instead of paying just the minimum monthly payment of $150 on Credit Card #2 you can actually afford to pay $200 every month. Once Credit Card #2 has been paid off in full, you start putting $220 every month towards paying off Credit Card #1 ($200 monthly payment for Credit Card #2 + $20 minimum payment for Credit Card #1). Paying $220 every month on a $500 balance will eliminate that debt in no time, plus you're saving money in interest by knocking off the debt with the highest interest rate. It's no wonder many people love the avalanche method, but both have their perks.

Debt Snowball vs. Debt Avalanche

Which method is right for you? Our Debt Calculator can help you figure that out, but it really comes down to your personality. While the avalanche method is apt to save you money in the long-run (and is often the preferred choice for Type A personalities), many prefer the snowball method because paying off the smallest debts first achieves quick upfront wins, which is really motivating for some people and helps them stay on track with their debt repayment. 

So what do the experts say? According a field study where consumers used both methods, the Journal of Consumer Research reveals that the snowball method is more likely to lead to success because of the psychological benefits and instant gratification related to paying off a debt balance in full quicker. But if you're looking for the best of both worlds (paying off debt faster and saving on interest) debt consolidation may be your best option. Whatever you choose, remember, the only wrong way of repaying debt is to not pay it!

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Topics: Debt Calculator

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