Avalanche vs. Snowball: Which Repayment Strategy Is Best?

What Is the Debt Avalanche Approach?

The debt avalanche strategy focuses on saving you the most money in interest over time. It does this by prioritizing your debts with the highest interest rates. If you decide to pursue the debt avalanche strategy, you'll need to do the following:

• Make a list of all of your credit card debts and order them by interest rate from highest to lowest.
• Put as much extra money as possible toward your debt with the highest interest rate after paying the minimum balances on all your other debts every month.
• Once you pay off the debt with the highest interest rate, move on to the debt with the next highest rate. Take the extra money you used to pay off the first card and add it to the minimum payment on this card until its debt is deleted. Continue paying off each card this way until you've paid off all your debts.

If you want to save as much money as possible and don't need positive reinforcement from knocking out loans quickly to stay on track, you may benefit from the debt avalanche method of repayment.

Debt Avalanche Example

Let's say you have credit card balances in the following amounts:

• $1,000 at 12% APR
• $800 at 10% APR
• $700 at 9% APR
• $300 at 3% APR

With the debt avalanche strategy, you'd make minimum payments on all of your debts except the card with the $1,000 balance because it has the highest interest rate. You'd focus on putting as much as possible toward that card until you pay it off. Then, you'd move on to the $800 debt and eventually make your way down to the $300 debt.

Pros and Cons of the Debt Avalanche

If you choose the debt avalanche strategy, you can reap this major benefit:

• Interest savings: By knocking off your debts with the highest interest rates first, you'll save money in the long run. If you have many high interest debts, this can add up to hundreds or even thousands of dollars in savings.

The most noteworthy disadvantage of the debt avalanche is:

• Motivation may be difficult: It may take a long period of time to pay off your first high interest debt. This can make it difficult to stay motivated and continue on with your debt-free journey.

What Is the Debt Snowball Approach?

With the debt snowball strategy, you focus on paying off your smallest debt first, then applying the payments that you were previously using toward it to pay the next smallest debt. That way, you're building momentum, or "snowballing" your payments as you pay off each card. If you go this route, here's what you'll need to do:

• Make a list of all your debts and order them from the lowest to highest balance.
• Put as much extra money as possible toward your debt with the smallest balance while paying the minimum balance on all your other debts every month.
• Once you pay off your smallest debt, move on to the next smallest one until you've paid off all your debts.

If you're overwhelmed with paying off your debt and need to celebrate milestones, this method will likely give you the boost you need to stay motivated since you'll pay off individual cards more quickly.

Debt Snowball Example

Imagine you have the same five debts listed above and want to try the debt snowball approach.

• $1,000 at 12% APR
• $800 at 10% APR
• $700 at 9% APR
• $300 at 3% APR

While you make minimum payments on all the other debts, find ways to pay more than the minimum balance for your $300 debt, since it is the smallest one. After you pay off the $300 card, you'll use the money that was going to pay that debt to pay off the debt with the $700 balance, and so on. You'll keep going until all of your debts have been paid.

Pros and Cons of the Debt Snowball

The major advantage of the debt snowball strategy is:

• Faster wins: If you have a lot of debt, it's going to take you some time to pay it off. With the debt snowball method, you'll gain momentum and stay motivated as you see smaller debts drop quickly.

The greatest drawback of the debt snowball is:

• Higher interest costs: The debt snowball method doesn't consider interest rates; it focuses on the balance owed on each card. This means you may be paying more in interest throughout the process.

Which Debt Repayment Strategy Should I Choose?

The debt repayment strategy you choose should depend on your unique goals and feelings about debt. If saving money on interest is your main motivation because you have a lot of high interest debt from things like credit cards and payday loans, the debt avalanche is your best option. On the other hand, if you find it tough to stay motivated and are looking for more immediate results, the debt snowball makes more sense.

Whichever method you choose—the debt avalanche, debt snowball or something completely different—the most important part is to stick to your plan. By committing to paying off your debt, you'll free up cash to achieve your financial goals, and stop putting money toward interest.