Money » Get Out Of Debt » Debt Avalanche vs. Debt Snowball: Which is Better For You?
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Debt Avalanche vs. Debt Snowball: Which is Better For You?

There are two ways that you can actually start paying off your debt and get off on the right foot, the debt snowball and the debt avalanche. How do they work and which of them is better for you?
Baruch Mann (Silvermann)
Baruch Mann (Silvermann)
Baruch Mann (Silvermann) is an experienced analyst and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Table Of Content

For many people credit cards provide a convenient way to make purchases, but for others their card is necessary to make ends meet. This can mean carrying credit card debt. There is over $800 billion in credit card debt in the US.

In this chart using data from Urban Institute, you can see that the age group 43 to 47 carries the highest average credit card debt. This age group has almost double the credit card debt of their under 32 year old counterparts or seniors aged 68+.

Average Credit Card Debt by Age

The Great Life of Being Debt-Free

If you’re in debt then you already know how important it can be to improve your finances, but it’s not always easy.

  • Increase Your Free Income – When you have a lot of debt, the payments on that debt consume a large portion of your income. Assume you have a $10,000 credit card debt with a 20 percent interest rate. The yearly interest payments will eat up about $2,000 of your income. If you can find a way to pay off that debt sooner, you'll suddenly have more than $167 extra income available each month. That's $2,000 per year that you could spend on whatever you want. You could treat yourself to that kitchen remodel you've always wanted, put more money into your favorite hobby, or take a luxurious vacation every year.
  • Increase Your Savings – That's right, living debt-free makes it easier to save! While it may be difficult to become debt free overnight, simply lowering your interest rates on credit cards or auto loans can help you begin saving. Those savings can be deposited directly into a savings account or used to accelerate debt repayment. More savings enables you to create an emergency fund, plan a fun trip, and even save for retirement.
  • Less Danger – One of the most dangerous aspects of being in debt is the risk it introduces into your life. If you're already in debt and don't have any emergency savings, you're always one financial blow away from disaster. If you lose your job or suffer a major medical emergency, you may find yourself unable to make your debt payments.
  • Improved Credit Score – Carrying a lot of debt has a negative impact on your credit rating. The closer your credit cards and loans are to being maxed out, the lower your credit score will be. A low credit score can cost you thousands of dollars per year in higher interest rates, making it more difficult to get out of debt. On the plus side, as you pay down your debt, your credit score will improve. This, in turn, has the potential to provide a wide range of benefits.
  • Stress Reduction – Being in debt is a major source of stress. You are constantly concerned about how you will pay all of your bills and what will happen if you lose your job. The constant pressure of having to work to pay off debt while feeling guilty about spending on even minor pleasures wears you down. According to the American Psychological Association's 2019 “Stress in America” survey, money is the second-largest source of significant stress in 60 percent of people's lives. Healthcare, at 69%, and the economy, at 46%, were the other financial stressors.

A majority of Americans have a plan to reduce their personal debts within specific timelines, based on a poll conducted by Northwestern Mutual. 45% of Americans expect to pay off their debt in 1 to 5 years, compared to 9% who expect to pay debts for the rest of their lives. 34% of the respondents expect to pay off their debt in 6 to 20 years. Only 12% of the respondents said that they do not know how long they will be in debt.Chart: Time Consumers Expect to Remain in Debt in the U.S. 2021

Fortunately, there are two ways that you can actually start paying off your debt and get off on the right foot, the debt snowball and the debt avalanche. Each one is great for different types of people, so it’s going to be up to you to figure out which one works best for you. You just need to find out more about what each one is.

The Snowball Method

If you’re looking to pay off your smallest debt before anything else then you’re looking at the debt snowball.

With this method, you make payments on that smallest debt until it’s eliminated and then you take that payment and roll it into the payment you’re already making for the next smallest debt.

As you continue to pay off debts you start paying more and more on the next one until everything is gone. The big benefit to this method is that you feel like you’re getting somewhere faster because you have debts disappearing.

For a lot of people, the fact that they feel like they’re moving forward and like they’re getting somewhere on their debt is enough to keep them motivated to continue.

It might be a little more expensive because you’re not paying attention to interest rates, but if it works then it’s worth the extra cost.

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The Snowball Method – Example

Okay, so let’s break down how this process is actually going to work for you, shall we? Once you’ve got all of your bills out and ready you put them in order from smallest to largest.

You’re going to make the minimum payment on all of those bills and then any extra money you may have you add to the minimum payment for the smallest bill. Then you work your way up the list, paying the extra on each debt.

Let’s make it a little easier to understand though, shall we?

Let’s look at an example of 4 different debts, including one that’s $500, one that’s $400, one that’s $200 and one that’s $100.

When you arrange them and start making payments under the debt snowball you’re going to pay the smallest one before any of the rest.

  • $100 – $15 minimum payment
  • $200 – $20 minimum payment
  • $400 – $20 minimum payment
  • $500 – $30 minimum payment

What this means is you need to have $85 a month just to make the minimum payments.

But let’s say you have $120. You would pay the minimum on the three highest debts (a total of $70), leaving you with $50. You would put that whole $50 to your first debt.

When you pay off that debt you take the $50 you were paying to the first debt and apply that (plus the $20 minimum) to the second debt. You would continue to do this until you paid off each debt.

Getting that first debt out of the way quickly makes you feel more accomplished and helps you to stick with the process.You’re going to spend a little more time paying off your debts because you’re going to have more interest being tacked on as you go.
Getting rid of a small balance quickly means that you have more money to add on to the next debt more quickly.The interest rates on your debts probably don’t line up with the amount of money you spent on them, which means you’re going to pay more interest.

The Avalanche Method

With this method of debt payment, you’re actually paying based on the interest rate instead of the balance. You work at the debt with the highest interest rate and pay that one first, then work down the list. 

This can be a benefit because when you pay on the debt that has a high-interest rate you’re going to end up paying less over time.

Each month you’re going to pay more to the principal and less to the interest, much faster than the debt snowball.

One of the biggest problems and hardest parts of getting yourself out of debt is all that interest that continues to rack up over time.

When you get rid of the high interest you’re going to make even bigger progress (even if it doesn’t feel like it). You’re going to actually cut down on the amount of interest you pay and you’re going to actually get out of debt faster this way.

The Avalanche Method – Example

Let’s look at that same debt again: $500, $400, $200, and $100.

The first time around you put them in order of smallest to largest, but this time let’s take a look at them in order of highest to lowest interest.

  • $400 – 25% interest, $20 minimum payment
  • $200 – 20% interest, $20 minimum payment
  • $100 – 15% interest, $15 minimum payment
  • $500 – 10% interest, $30 minimum payment

If you have a little more to pay on your debts, say $170, you want to apply the money you have in this order.

You’re going to start with the minimum payments for the last three debts, a total of $65. But then you’re going to take the $105 you have left and apply all of it to the debt with the highest interest rate, the $400 one with 25%.

When you pay off debt one you’ll move down to the second one and add that $105 to the $20 minimum you’re already paying. Keeping going until you get through all of the debt.

You’re going to pay off your debt a whole lot faster because you’re paying less in interest the entire way through.You may have a bit of trouble with motivation because you’re not going to see debts  disappearing as quickly as you would with the snowball method.
You won’t spend as much money on interest.You’re going to have to dedicate yourself and really get into the internal motivation because you won’t see a change to your debt for a while.

What is an Advantage to Using the Debt Snowball Method?

The debt snowball method allows you to start paying off your smallest debts first. Even though they might not be the highest interest, you are still eliminating the amount of debt you have quicker because you are attacking the small debts with large payments.

When you start to see some of your payments going down each month, the sense of achievement will encourage you to keep eliminating all your debts until you don’t have any left. Attacking the small debts first also lets you have fewer payments you need to remember each month.

What is an Advantage to Using the Debt Avalanche Method?

The main benefit of using the debt avalanche method is that you are paying the high-interest debt first. High interest rates can make your minimum payments extremely high and cause you to pay much more than your actual balance.

By using the debt avalanche method, you will make higher payments toward the highest interest debt so that you stop accruing so many extra fees. Even though you do not see results right away, this method saves you more money over the course of the next few years.

Which is Better For You?

The best method is going to be the one that works for you, so try to figure out what that’s going to be because both are going to get you debt-free.

For those who are really dedicated to getting themselves out of debt, it’s going to be up to you to choose which method is going to fit your needs. Keep in mind that saving a little more money isn’t going to help if you can’t stick to it, so pick what’s going to keep you going.

Does it make you feel more motivated to see your debt disappearing by getting rid of bills or do you want to save money? If you want to know more about how much you’re actually going to save you can check it out online.

There are a whole bunch of calculators that will help you compare the two methods of debt payment and see which will save you the most money and take you the least time. If you use the avalanche method you may be able to actually save thousands of dollars and quite a bit of time in the process of paying off the debt.

On the other hand, for those who don’t have a whole lot of debt or who have trouble sticking to a plan that doesn’t have a lot of visible results, it might be best to go with the snowball.

Maybe you want to create your own hybrid plan where you pay off certain types of debt such as credit cards and then car loans and then student loans. No matter which method you use, it’s going to be important that you stick with it to get your finances back on track.

The calculators you can find online will help you figure out what you’re going to have for a timeline and for the interest rate.

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At the beginning of your debt-free process, the debt snowball method is quicker. You will see that you have paid off smaller debts in as little as 12-24 months. Once you have paid off the smallest debts though and start getting into the bigger ones with high interest, you might find that your debt elimination stalls a bit.

Using the debt snowball method though will get rid of unwanted small debt much faster than the debt avalanche method.

Paying off your smallest debts first gives you a higher sense of achievement because you see the payments you have each month decreasing right away. However, the smallest debts might also have small interest, which means you aren’t incurring too many fees on them.

Paying off your debts with the highest interest doesn’t give you results right away. You might see your balances not going down any because you are only paying the interest back instead of the actual balance of the debt. However, paying off high-interest debt first means you have less money paid in fees in the future.

This depends on your life goals and how much extra money you have coming in every month. If you have a big purchase coming up or have an emergency, it might be better to start putting money into savings.

However, if you have large amounts of debt that are affecting your quality of life, you might want to prioritize paying those off as quickly as possible. If you can, try to pay off debt every month and then also put a little money into savings with whatever you have leftover

This depends on your APR and your interest rate. It also depends on if you are only paying the minimum payment or if you are making higher payments each month to try and pay the debt off quicker.

If you have $30,000 in debt with a 15% interest rate, you will have to make a minimum monthly payment of $900. This means it will take you about 23 years to pay it off. Your final bill will also be around $51, 222.13 rather than the original $30,000.

Lower interest rates don’t take as long to pay off, so always try to get credit cards or loans with the lowest interest rate possible.

Although paying off your last debt may feel liberating, it will not necessarily improve your credit score. Worse, it may actually lower your score, which may seem counterintuitive.

Paying off your credit card helps reduce credit utilization because your balance accounts for a small percentage of your total credit limit.
However, if you close the recently paid-off account, you will lose the account's credit limit, and your other balances will now account for a larger percentage of the total.

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