Debt Snowball vs. Avalanche: Which Works Faster?
The snowball and avalanche methods are two popular strategies you can use when getting out of 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 highest interest rate first.
Here’s how they both work, and how to decide 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 smallest to largest. After making minimum payments on all of your accounts, you put any remaining money into the minimum balance. For example, if you have a $500 balance on a personal loan and a $1,000 balance 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.
Winning is compounded and feels like a snowball rolling down a hill and gaining momentum.
Gold Investor Kit Gift: Sign up with American Hartford Gold today and get a free investor kit, plus up to $20,000 in free silver on qualifying purchases.
How the debt avalanche method works
The debt avalanche method aims to reduce how much interest accrues on your balances. This strategy prioritizes your debts with the highest interest rate first (again, after dealing with minimum payments on all accounts). Then, you move on to debt with the second highest interest rate, and so on.
A balance with a 20% annual percentage rate (APR) is ranked higher than a balance with a 10% APR. This strategy often saves a lot of money in interest.
Free Trades: Check out Robinhood’s online trading platform and get your first trade with it
Debt against the avalanche path
Assume that someone has $20,000 in credit card debt across three cards with the following balances and terms:
- Credit card 1: $5,000 credit at 18% APR
- Credit card 2: $10,000 loan at 22% APR
- Credit card 3: $5,000 credit at 12% APR
The credit snowball method suggests choosing one or three credit cards to start. The credit avalanche method suggests focusing first on a second credit card with a 22% APR.
Although it will take longer to pay off a $10,000 balance than a $5,000 balance, you’ll likely pay less interest over time if you focus on higher-interest debt. Tackling the debt with the highest APR first can help you get out of debt faster overall.
Extra Cash: Get up to $1,000 in stocks when you fund a new active SoFi investment account
Should you choose the snowball or avalanche method?
Regardless of which method you use, it is important to document your credit balances and rates. That will give you a complete overview of your financial situation and help you track progress. Small payments are a good start, but you’ll pay off debt quickly if you make more than the minimum payments.
The debt snowball approach may make sense for people who need extra motivation to pay off debt and want to see small wins add up. However, the debt avalanche method can save you more money, and possibly even more time.
