DEBT SNOWBALL OR DEBT AVALANCHE: WHICH ONE SHOULD YOU USE?

Almost everyone I sit down with has more than one debt. A credit card or two, maybe a personal loan, maybe a car. And almost everyone asks me the same question early on: which one do I pay off first?

There are two well known answers. One is called the debt snowball. The other is called the debt avalanche. Both work, and both can get you to zero. They differ in what they reward along the way.

THE TWO METHODS IN PLAIN TERMS

With either method you pay the minimum on every debt, every month, so nothing falls behind. Then you send every extra dollar you can find to one target debt. When that debt is paid off, you take everything you were paying on it and add it to the next one. Your payment grows as you go, which is where the snowball name comes from.

1. 1

   Debt snowball. Your target is the smallest balance first, whatever the interest rate.

2. 2

   Debt avalanche. Your target is the highest interest rate first, whatever the balance.

A SIMPLE EXAMPLE

Say you have three debts, $10,600 in all:

1. 1

   A store card with $900 at 15 percent, minimum payment $35.

2. 2

   A credit card with $4,200 at 24.9 percent, minimum payment $125.

3. 3

   A personal loan with $5,500 at 9 percent, minimum payment $175.

The minimums add up to $335 a month. Now say you look hard at your budget and find another $150, so you pay $485 a month in total and keep paying that amount until everything is gone.

With the snowball, the store card goes first. It is paid off in month 6. You are debt free in 26 months and pay about $1,864 in interest.

With the avalanche, the credit card goes first. It is paid off in month 19. You are also debt free in 26 months and pay about $1,756 in interest.

So in this example the avalanche costs about $108 less, and the snowball gives you your first paid off account more than a year sooner.

Now look at one more number. If you paid only the $335 in minimums, still rolling each payment forward as debts were cleared, it would take 43 months and about $3,647 in interest. The extra $150 a month did far more than the choice of method ever could.

WHICH ONE IS RIGHT FOR YOU

On paper the avalanche usually comes out ahead, because your most expensive debt gets the least time to grow. The gap gets wider when your highest rate debt is also one of your biggest balances.

A plan only helps if you stay with it, though. If you have tried before and quit, a balance hitting zero in a few months can be worth more than a hundred dollars in interest. For a lot of people, that first win is what keeps them going on the hard weeks.

Here is how I would think about it:

1. 1

   If numbers motivate you and you know you will stay the course, start with the avalanche.

2. 2

   If you need to see progress to keep going, start with the snowball.

3. 3

   If two debts have close interest rates, pay the smaller one first. You give up very little and get a quicker win.

4. 4

   Whichever you pick, write the order down and keep it somewhere you will see it every month.

BEFORE YOU START

Both methods begin with the same step: a full list of everything you owe. For each debt, write down the balance, the interest rate, the minimum payment and the due date. Many people have never seen all of it in one place. Seeing it can feel heavy at first. It is also where things start to get clearer.

Then find your extra amount. It does not have to be $150. Even $25 a month, sent to one target debt every single month, moves your finish line closer.

Two habits protect the plan. Stop adding new charges to the cards you are paying down, or you will be running in place. And if you can, keep a small cushion in savings so one surprise bill does not land right back on a card.

WHERE CONSOLIDATION FITS

Some people with several high rate balances look at a third path: a debt consolidation loan that combines them into one payment. If the rate is lower and the term is not stretched too far, that can mean less interest and one due date instead of several. If the term is stretched, it can cost more over time. I walked through that trade in Does a Lower Monthly Payment Actually Save You Money?

Consolidation is the work we do at Key 2 Debt Free. Key 2 Debt Free is not a lender, and a licensed lender makes every approval decision. If you would like help laying your debts side by side and seeing whether combining any of them makes sense, you can book a consultation.

I shared the plain steps I followed in The Key, and the story of where I started in Welfare to Wealthy. If you want to talk about your own next step, you can reach me here.

Rachael J Katz is a financial educator, author and speaker. This article is general education, not personal financial advice. The figures above are a simplified example with fixed rates and payments, and your own terms will differ.