Debt Snowball vs. Debt Avalanche Method

What Is the Debt Snowball Method?

The debt snowball method encourages you to get rid of your smallest debt first, then put that monthly payment toward the next smallest debt. That helps you build momentum by "snowballing" your payments as you pay off each debt.

How to Pay Off Debt Using the Snowball Method

Here are the steps to paying off debt using the snowball method:

1. Make a list of all your debts and order them from lowest to highest balance.
2. Put as much extra money as possible toward your debt with the smallest balance while paying the minimum balance on the others every month.
3. Once you pay off your smallest debt, put that monthly payment toward the next smallest one. Keep going with each debt until you've paid off all your balances.

Debt Snowball Example

As you evaluate your situation, let's say you have the following debts:

You also note that you can afford to put an extra $100 toward your debts each month. The personal loan has the smallest balance, so you'll put $300 ($200 plus the extra $100) toward that debt while making the regular monthly payment on the others.

Once that balance is paid off, you'll add the $300 to your credit card payment, bringing it to $450 until it's paid in full. By the time you only have your private student loan, your monthly payment will be $675.

If you stuck with your original repayment plan, it'd take you 50 months to pay off all your balances. But with the debt snowball approach, you'll be debt-free in 25 months, and you'll save $​​2,251 in interest.

Pros and Cons of the Debt Snowball Method

Depending on your situation, goals and preferences, the debt snowball approach may or may not be the right choice for you. Here are some benefits and drawbacks to consider.

Pros

• Quick wins: You'll gain momentum and stay motivated as you see smaller debts drop away. The debt avalanche method, by contrast, may require you to pay off a large debt first, which won't offer a feeling of gratification as quickly.
• Easy to implement: It may be easier to order your debts by balance than by interest rate. You may already have a sense of your debts' sizes, but you'll have to search for their interest rates.
• Can result in more savings: Depending on your situation, you may also be able to save more interest and pay off your debt more quickly with the debt snowball than if you were to use the debt avalanche.

Cons

• Less interest savings: The debt snowball method doesn't consider interest rates; it focuses on each debt's balance. This means you may be paying more in interest throughout the process.
• Other factors may take precedence: The debt snowball method may not take into account other reasons you could want to pay off certain debts earlier than others. For example, if you used a cosigner for a student loan or have a loan with a variable interest rate that's likely to rise, you may want to pay off that loan first regardless of the balance.
• Could take longer: Since you're not minimizing your interest payments, it could take slightly longer to accomplish your goal with the debt snowball strategy.

What Is the Debt Avalanche Method?

For the most part, the debt avalanche strategy works the same as the debt snowball method. The difference is that the avalanche approach helps you to pay off multiple debts based on their interest rates. You'll pay off the highest-rate debt first, which could save you the most money in interest over time. Plus, once you're in the habit of paying extra toward one debt each month, you can keep that up for each subsequent debt and continue saving interest.

How to Pay Off Debt Using the Avalanche Method

Here are the steps to paying off debt using the avalanche method:

1. List your debts in order from highest interest rate to lowest.
2. Put as much extra money as possible toward your debt with the highest interest rate, and pay the minimum required each month on the rest.
3. Once the first debt is gone, move on to the debt with the next-highest rate. Pay extra toward that debt until it's gone. Continue paying off each debt this way until you've eliminated all of them.

Debt Avalanche Example

For a proper comparison with the debt snowball method, let's use the same details:

The credit card has the highest interest rate, so you'll put $250 ($150 plus the extra $100 you can afford to pay) toward that debt while making the regular monthly payment on the others.

While paying down your credit card, you'll also pay off your personal loan with just the minimum payment, after which you'll increase your credit card payment to $450. Once that balance is paid off, you'll put the full $675 toward the private student loan.

For this particular scenario, you'll pay off your debt in 26 months, which is one month more than with the debt snowball method. Your total interest savings will be $2,213, which is slightly less than the $2,251 you'd save with the debt snowball.

Pros and Cons of the Debt Avalanche Method

Before you consider this option, it's important to consider the potential advantages and disadvantages. Here's what to keep in mind.

Pros

• Interest savings: You'll earn the equivalent of the interest rates of your highest-rate debts when they're paid off, which likely means saving more money than if you used the snowball method.
• Peace of mind: While you may not see the results of your efforts as quickly with the debt avalanche method, you'll know that you're choosing the option that puts more money back into your checking or savings account over time.
• Can save you some time: Depending on the makeup of your debt, the avalanche approach could help you pay off your balances more quickly.

Cons

• Motivation may be difficult: Depending on which debt has the highest interest rate, it may take a while to pay off your first balance. This can make it difficult to stay motivated and continue your debt-free journey.
• Other factors may be more important: Like with the debt snowball method, there may be features of your debts beyond the interest rate that impacts when you'd like to pay them off.
• More savings isn't guaranteed: While you're more likely to earn more savings with this approach, the results will depend on the details of your debt situation.

More Tips for Paying Off Debt

Depending on your situation and objectives, you may also consider other ways to pay off debt, particularly if you have a lot of high-interest credit card balances. Here are some alternatives to compare.

• Debt consolidation loan: A debt consolidation loan is essentially a personal loan used to pay off other debt. In general, personal loans have a lower average interest rate than credit cards. They also offer a fixed repayment term, which can help you avoid getting stuck in a minimum payment trap. While it's possible to get approved even with a low credit score, you typically need good or excellent credit to qualify for favorable terms.
• Balance transfer credit card: A balance transfer credit card typically offers an introductory 0% APR promotion, allowing you to pay down your credit card debt interest-free for a period ranging from 12 to 21 months. If you have a balance remaining at the end of the promotion, you'll only incur interest on that amount. These cards typically charge an upfront fee of 3% to 5% of the transfer amount, and you also typically need good credit to get approved.
• Debt management plan: If you're having trouble paying down your debt on your current budget—even with these other strategies—consider consulting a credit counselor. In addition to personalized budget and debt management advice, a credit counselor may offer you a debt management plan, which could make your monthly payments more affordable. Note, however, that there are typically fees involved, and you may need to close your credit cards.

Learn more >> How to Pay Off Debt Listed on Your Credit Report

The Bottom Line

Once you've made the decision to pay off debt, you've already committed to an important and worthwhile financial move. When choosing the right debt payoff method, consider what will encourage you to maintain that drive: saving money or getting individual debts off the books. If you can consolidate some or all of your debts and pay them off at a lower interest rate, you may be able to reach your goals of becoming debt-free even sooner.

As you work to pay down your debt, check your credit score often to understand how your efforts impact your credit health and to keep track of your progress.