Published in: Credit Cards | Dec. 24, 2018

Debt Snowball vs. Debt Avalanche

Should you use the debt snowball or debt avalanche method to pay off your debts? Find out more about these two popular approaches here.

frustrated man and woman sitting on couch looking at paperwork

Image source: Getty Images

When it comes to paying off debt, having a strategy can mean the difference between success and failure. By creating a debt repayment plan, you can decide how much extra cash to pay towards your debt and what debt to pay off first. Your plan will help you to stay motivated and will maximize the chances you'll be able to become debt free as quickly as possible.

Of course, knowing you need a repayment plan is just the first step -- you also need to figure out which plan is the right one for you. There are two primary options to consider that many borrowers have found success with: the debt snowball approach and the debt avalanche approach. Both have their pros and cons, so you'll need to decide which is right for you.

The debt snowball method

The debt snowball method works best for many borrowers because it is an approach designed to help you stay motivated based on human psychology. With the debt snowball method, you begin by paying off your smallest debt first. This gives you a quick win to keep you inspired. Then, you move up to the next smallest debt and the next one, until all of your debt has been repaid.

Basically, the process works like this: say you have three debts:

  • A $1,000 credit card bill with a $25 monthly minimum payment
  • A $5,000 credit bill with a $125 monthly minimum payment
  • A $10,000 personal loan with a $300 monthly payment

You'd pay the minimum to each, and then put all your extra cash towards paying off the $1,000 balance first. So, if you had $600 per month to put towards debt repayment, you'd pay $175 towards the $1,000 credit card; $125 towards the card you owe $5,000 on; and $300 towards the personal loan.

Once you'd paid off the $1,000 debt, you'd roll that payment into the $5,000 debt. So, your monthly payment on that debt would now be $300, along with $300 to the personal loan. And, finally, once your $5,000 credit card balance had been paid off, you'd pay the full $600 towards the personal loan until you were debt free.

The pros of the debt snowball method

The biggest benefit of the debt snowball method is a psychological one: you get to see one of your debts paid off as quickly as possible. This can inspire you to continue working on your repayment plan, and maybe even to step up your debt repayment efforts.

Harvard Business Review touted a study showing beginning with the smallest debt actually does cause you to be more motivated, which can maximize the chances you'll be able to successfully pay off your debts ASAP.

The cons of the debt snowball method

The big disadvantage of the debt snowball method is that your smallest debt may have a lower interest rate than some of your debts with higher balances. For example, your smallest debt may be a personal loan at 8% interest while your biggest debt might be a credit card at 23% interest.

If you focus on paying off low interest debt first because it has a smaller balance, you'll take much longer to repay high interest debt than you would if you'd begun putting your extra cash towards that high interest loan. In some cases, it could take you years to pay off your low balance debts at low interest before you finally begin aggressively repaying high interest debt. This could result in substantial additional interest being paid.

For example, let’s say your debts were as follows:

  • $4,000 owed on a personal loan at 8% with $150 minimum monthly payments
  • $5,000 owed on a credit card at 18% interest was $125 minimum monthly payments
  • $8,000 owed on a credit card at 24% interest with $200 minimum monthly payments

If you followed the debt snowball method, you'd be starting by paying off your lowest interest loans first. If you had $650 monthly to pay towards your debt, it would take you 36 months to pay off your debt using the debt snowball method.

But, if you took a different approach called the debt avalanche, which we'll discuss next, you'd pay off your debts in just 34 months -- two whole months sooner. More importantly, you would save $959.70 on interest over the long term by tackling your highest interest debt first.

The debt avalanche method

The debt avalanche method is a twist on the debt snowball method, which takes into account the fact that higher interest loans are more expensive. With the debt avalanche method, you make minimum payments on all your debt and devote any extra money to paying off the highest interest debt first.

So, if you took our above example where you owed:

  • $4,000 owed on a personal loan at 8% with $150 minimum monthly payments
  • $5,000 owed on a credit card at 18% interest was $125 minimum monthly payments
  • $8,000 owed on a credit card at 24% interest with $200 minimum monthly payments

You'd put extra monthly money towards the $8,000 debt because the interest is higher. If you had $650 monthly to pay toward your debt, you'd pay $375 per month on your card at 24% interest, $125 on your card at 18% interest, and $150 on your personal loan.

Once you'd paid off your highest interest card, you'd roll that payment into the next highest interest debt, so you'd pay $500 to the card at 18% interest and $150 to the personal loan. And, finally, after paying off both your credit cards, you'd devote the entire $650 to the personal loan.

The pros of the debt avalanche method

The big benefit of the debt avalanche method is that you'll ultimately become debt free more quickly -- assuming you stick to your plan -- and will pay less in interest because of it.

The cons of the debt avalanche method

The big disadvantage of the debt avalanche method is it may be harder to stay motivated since it can take you a long time to get a “win” by repaying one of your debts in full.

In our above example, for instance, if you used the snowball method and paid off the $4,000 personal loan first, you'd have your personal loan paid off in 13 months and would get to cross that debt off your list.

But, if you chose the debt avalanche method, you wouldn't pay off your $8,000 credit card balance for a full 29 months -- more than a year later. Since it takes you so much longer to cross that milestone, it can be harder to continue being aggressive in your debt repayment efforts.

Which method is right for you?

Ultimately, you'll have to decide if you think the debt snowball method is going to be most successful at helping you pay off debt because this approach has been proven to help people stay on track, or if you want to use the debt avalanche approach because the math says this method can be cheaper. If you opt for the debt avalanche approach, try to find other ways to stay motivated, such as setting mini goals for yourself that you celebrate to turn them into wins.

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