Debt Avalanche vs. Debt Snowball: What's the Difference?
Debt Avalanche vs. Debt Snowball: An Overview
Paying off debt is no easy task, especially if you just pay the minimum amount due each month. To get free and clear, you often have to accelerate payments. There are two distinct strategies to settle outstanding balances in this way: the debt avalanche method and the debt snowball method.
Both debt avalanche and debt snowball apply to most kinds of consumer debt: personal, student, and auto loans; credit card balances; medical bills. (They do not work with, and shouldn't be tried with, mortgage repayments.) Each method requires that you list out your debts and make minimum payments on all but one of them. That one you pay extra money towards, with the aim of wiping it out first. Once it's erased, you target another balance; the extra money you apply towards it could be the minimum sum you had to pay on the erased debt.
The two strategies diverge over which debt you single out first. In the debt avalanche method, you pay extra money toward the debt with the highest interest rate. With the debt snowball method, you pay down the smallest debt first and work your way up, regardless of the interest rate.
While both are useful strategies to get debt out of your life, one method might be easier for you to stick with and make a bigger impact on your finances. Let's look at each approach in-depth, covering the pros and cons of the debt snowball and the debt avalanche. Then, we'll discuss some special considerations when tackling debt. By the end, you should have a good sense of determining which debt repayment method is best for you.
Debt avalanche and debt snowball are both types of accelerated debt repayment plans.
The debt avalanche method involves making minimum payments on all debt, then 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 first before moving on to bigger ones.
The debt avalanche method can result in paying less interest over time but requires discipline.
The debt snowball method can be more expensive but yields quicker results—valuable for maintaining motivation.
The debt avalanche method involves making minimum payments on all your outstanding accounts, then using any of the remaining money earmarked for your debts to pay off the bill with the highest interest rate. Using the debt avalanche method will save you the most in interest payments.
Debt Avalanche Example
For example, if you have $3,000 extra to devote to debt repayment each month, then the debt avalanche method will make your money go the furthest. Imagine that you have the following debts:
$10,000 credit card debt at 18.99% annual percentage rate (APR)
$9,000 car loan at 3.00% interest rate
$15,000 student loan at 4.50% interest rate
In this scenario, the avalanche method would have you pay off your credit card debt first, then allow you to pay off your remaining debt in 11 months, paying a total of $1,011.60 in interest. The snowball method would have you tackle the car loan first, becoming debt-free in 11 months, but you would have paid $1,514.97 in interest.
Just by switching the order of your debts, you can save hundreds of dollars in interest. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.
Pros and Cons of the Debt Avalanche Method
Just by switching the order of your debt payoffs, you can save hundreds of dollars in interest payments with the debt avalanche approach. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.
The debt avalanche method is the best strategy to save money and time, but it does have its downsides. Mainly, it requires discipline—to put all your extra allocated money into paying off a particular debt, and not just the minimum. The debt avalanche will not work as effectively if you lose motivation and skip a month or two of strategic repayments.
The debt avalanche approach also assumes a certain, constant amount of discretionary income that you can apply towards your debts. A bump-up in daily living expenses or an emergency could throw a crimp into the plan.
Minimizes the amount of interest you pay
Lessens the amount of time it takes to get out of debt
Takes discipline and commitment to pull off
Requires constant amount of discretionary income
The debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones—kind of a "tackle the easy jobs first" approach. You make a list of all the outstanding amounts you owe, in ascending order of size. You target the first one to pay off first, putting as much extra money into each payment as you can afford.
The others you pay just the minimum on. When the first debt is settled, then you target the next-smallest one for the extra-payment treatment.
The Pros and Cons of Snowballing Your Debt
Now you know what the snowball debt method is, let’s look at some of the pros and cons.
While it is dubbed as the most effective way to get yourself out of debt, like everything, there are still a few downsides you need to be aware of. By comparing the pros and cons below, you’ll be able to make a much better decision about whether the snowball method is right for you.
Let’s start with the pros of snowballing your debt:
Fast results – The first benefit is that you’ll start to see results really quickly. This is key to why the method works.
Obviously, you’ll want to get out of debt as quickly as possible. So, when you start seeing fast results, it shows you that you could be debt-free much sooner than you thought you would be. If you’re looking for the fastest way out of debt, this is definitely a method to consider.
Psychological benefits – Another pro of this method is the fact it makes you feel good. As you blast your way through your debts, you’ll start to feel much happier, more in control and a lot less stressed.
You’ll find it easy to stick to – When you’re in a lot of debt, it’s easy to give up. However, with the snowball method, your motivation is consistently high as you see results pretty quickly. So, if you’re looking for a debt reduction method you can stick to, the snowball method is the perfect option.
It changes your behavior – Perhaps one of the biggest benefits of snowballing your debt, is that it doesn’t just get you out of money troubles, but it also changes your behavior. You’ll start to develop much healthier spending habits, helping you to stay on track even once your debts have been paid off.
These are some pretty compelling benefits, but before you decide whether or not it’s right for you, let’s take a look at some of the cons of the snowball debt method.
Although the snowball method definitely has a lot of advantages, it’s not without its potential drawbacks. They include:
It may be difficult to acquire credit in future – If you follow the debt snowball method strictly, its founder Dave Ramsey, recommends closing down your credit card accounts once they’ve been paid off. While this will stop you from falling victim to the same debt trap, it could make it more difficult to generate the credit you need in the future.
This is because, the fewer credit cards and loans you have, the worse your credit score becomes. It doesn’t sound logical does it, but provided you are making more than the minimum repayments, it builds up your borrowing history, showing lenders you can be trusted to pay the money back.
You could end up paying more overall – As the smallest debt is targeted first, if your largest debt has a high interest rate, you could end up paying a lot more back over time. So, it may not make financial sense to follow this method until the higher debts have been significantly lowered.
These are the main two cons to be aware of. For most debts, the snowball method does work well. However, if you do have higher debts with a high interest rate, you may want to consider a different method until you can get them down.
As you can see, there’s definitely more pros to the snowball method than there is cons. However, it’s still best to consider both the advantages and the disadvantages of the method before deciding whether it’s right for you.
The Bottom Line
If you are serious about tackling your debt, then pick which method is best for your own situation and personality. The best method is the one you can stick to. If you are a person that needs more incentive to pay off debt, then stick with the debt snowball method. If devoting money to interest payments—instead of denting principal—drives you nuts, then you might prefer the debt avalanche approach.
You can also use a combination of the two methods. Choose a debt that's relatively small (a la the snowball method) but that carries a high-interest rate (for the avalanche approach) to tackle first.
If both methods appear insufficient, you may want to consider debt relief instead.
Both debt repayment plans are useful and can help you regain financial freedom. Use specialized debt repayment calculators to discover when you will pay off your debt and how much interest you will pay.