Debt Avalanche vs. Debt Snowball: Which Payoff Method Fits You
If you have several debts, such as credit cards, a car loan and a personal loan, the order in which you pay them off affects both how much interest you pay and how motivated you stay. The two best-known approaches are the debt avalanche and the debt snowball. Both start the same way, and they differ only in which debt gets your extra money first.
The common starting point
With either method, you keep making the minimum payment on every debt so that nothing falls behind. You then decide on a fixed extra amount you can put toward debt each month, whether that is $50, $200 or more, and send all of it to one target debt. When that debt is paid off, you add its old minimum payment to your extra amount and move to the next debt, so the amount going toward debt keeps growing as each balance disappears.
The debt avalanche
The avalanche method sends your extra money to the debt with the highest interest rate first, regardless of its balance. Because high-interest debt grows fastest, paying it off first reduces the total interest you pay and usually gets you out of debt sooner. The trade-off is that if your highest-rate debt also has a large balance, it can take a long time before you see one account reach zero.
The debt snowball
The snowball method sends your extra money to the debt with the smallest balance first, regardless of its interest rate. Small balances disappear quickly, which gives you early wins and frees up their minimum payments to roll into the next debt. The approach was popularized by personal finance author Dave Ramsey, and some research on consumer behavior suggests that paying off individual accounts in full helps people stick with repayment. The cost is that you will usually pay more total interest than with the avalanche.
An example
Imagine three debts and an extra $300 a month to put toward them:
- Credit card A: $1,200 balance at 24 percent interest.
- Credit card B: $6,000 balance at 27 percent interest.
- Personal loan: $4,000 balance at 11 percent interest.
With the avalanche, the extra $300 goes to credit card B first because it has the highest rate, then to credit card A, then to the personal loan. With the snowball, the extra $300 goes to credit card A first because it has the smallest balance, and that card is paid off within a few months. Its minimum payment then rolls into the next smallest balance, the personal loan, followed by credit card B.
In this example the avalanche saves more in interest because the largest balance also carries the highest rate. When the rates on your debts are close together, the difference in interest between the two methods tends to be small.
How to choose
Choose the avalanche if you are motivated by numbers and confident you will stick with the plan even if your first payoff takes a while. Choose the snowball if you have struggled to stay with a debt plan before and quick wins would help you keep going. A hybrid also works well, for example paying off one or two very small balances first for momentum and then switching to the highest-rate debts.
Ways to speed up either method
- Ask for a lower rate. A call to your card issuer asking for a lower interest rate is sometimes successful, especially if you have a history of paying on time.
- Consider a balance transfer or consolidation loan. A 0 percent balance transfer card or a lower-rate consolidation loan can cut interest, but check the transfer fees and the rate after the promotion ends.
- Send windfalls and side income to the target debt. Tax refunds, bonuses and side hustle earnings can shorten the timeline considerably.
- Stop adding new debt. Paying with debit or cash while you repay keeps the balances moving in one direction.
If your debts feel unmanageable, a nonprofit credit counseling agency can look over your situation and explain options such as a debt management plan. Look for agencies affiliated with the National Foundation for Credit Counseling.