Debt Avalanche vs. Debt Snowball: What's the Difference? (2024)

FAQs

Debt Avalanche vs. Debt Snowball: What's the Difference? ›

As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced is accelerated. In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first.

The avalanche and snowball methods are two debt payoff strategies with the same goal—no debt—but different steps to use along the way. The avalanche method prioritizes eliminating high-interest debt while the snowball method prioritizes paying off the smallest debts first.

The debt avalanche method involves making minimum payments on all debt and using any extra funds to pay off the debt with the highest interest rate. The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts before moving on to bigger ones.

Disadvantages of using the avalanche debt payoff method

Requires patience: Because repayment may be slower, depending on your balances, it may feel like you're not making any progress toward paying off your debt. This can make it harder to stay motivated and stick to your repayment plan.

Prioritizing debt by interest rate.

This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.

If you're motivated by saving as much money as possible down to the last penny, you'll probably prefer the “avalanche” method. On the other hand, if getting a quick win right off the bat encourages you to keep moving forward, then the “snowball” method will likely motivate you the most.

With the debt snowball method, you start with your smallest debts and work your way up to the largest ones. While it may not save you as much in interest as other repayment methods, the debt snowball method can keep you motivated to continue paring down your debt.

An Example of the Debt Snowball

$500 medical bill—$50 payment. $2,500 credit card debt—$63 payment. $7,000 car loan—$135 payment. $10,000 student loan—$96 payment.

In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first. Similar to the "snowball method," when the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done.

What are the pros of the debt avalanche method? ›

The advantage of the debt avalanche method is that it reduces the total interest you pay in the long term. Interest adds to your debts because most lenders use compound interest. The accrual rate depends on the frequency of compounding—the higher the number of compounding periods, the greater the compound interest.

High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.

Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.

Most of the credit scores that lenders use in the United States, including most versions of the FICO Score, range from 300 to 850. Therefore, most financial professionals generally accept that 300 is the lowest credit score a consumer can have.

Let's say you have an extra $300 a month. You'll make the monthly minimum payments on each card, and then pay another $300 on Card A. So, you'll be spending $400 a month on Card A until it's paid off. Once that's settled, you move on to Card B.

Paying off smaller balances first (debt snowball method) gives you motivation to keep going. Paying off higher-interest debt first (debt avalanche method) can save you more money. Paying off debt is good for your financial and mental health. What matters most is that you choose a method and stick with it.

So, if the smallest debt comes with a minimum monthly payment of $75 but you've found a surplus of $75 in your budget for debt reduction, then you'd couple the two dollar amounts to make a $150 monthly payment on the smallest debt. Keep the snowball rolling.