Avalanche vs. Snowball: Which Debt Repayment Strategy Is Best?

What Is the Debt Avalanche Strategy?

The debt avalanche strategy helps you to pay off multiple debts based on their interest rates. You’ll pay off the highest-rate debt first, which will save you the most money in interest over time. Plus, once you’re in the habit of paying extra toward one debt each month, you can keep that up for each subsequent debt and continue saving interest.

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.

Here’s how to do it:

1. List your debts in order from highest interest rate to lowest.
2. Put as much extra money as possible toward your debt with the highest interest rate, and pay the minimum required each month on the rest.
3. Once the first debt is gone, move on to the debt with the next-highest rate. Pay extra toward that debt until it’s gone. Continue paying off each debt this way until you’ve eliminated them.

Debt Avalanche Example

Let’s say you have three types of outstanding debt: a credit card with a $5,000 balance at 20% interest, a personal loan with a $1,000 balance at 10% interest and a private student loan with a $10,000 balance at a fixed 8% interest rate. While the student loan has a higher balance, the credit card has a much higher interest rate.

Using the debt avalanche strategy, you’d pay the minimum on the personal loan and student loan and pay extra toward the credit card until that $5,000 is paid off. Then you’d pay extra toward the personal loan until it’s gone, followed by the student loan.

Pros and Cons of the Debt Avalanche Strategy

The debt avalanche has the following benefits and drawbacks:

Pros

• Interest savings: You’ll earn the equivalent of the interest rates of your highest-rate debts when they’re paid off, which likely means saving more money than if you used the snowball method.
• Peace of mind: While you may not see the results of your efforts as quickly with the debt avalanche method, you’ll know that you’re choosing the option that puts more money back into your checking or savings account over time.

Cons

• Motivation may be difficult: It may take a while to pay off your first debt. This can make it difficult to stay motivated and continue your debt-free journey.
• Other factors may be more important: There may be features of your debt beyond the interest rate that impacts when you’d like to pay them off. For example, if you used a cosigner for a student loan and want that person to be free of the repayment obligation, you may pay off that loan first regardless of the rate. Or if a student loan has a variable interest rate that’s likely to rise, you may decide it’s important to knock out that debt now, even if its rate is lower than another debt’s.

What Is the Debt Snowball Strategy?

The debt snowball method encourages you to get rid of your smallest debt first, then put that monthly payment toward the next smallest debt. That helps you build momentum by “snowballing” your payments as you pay off each debt.

If you’re overwhelmed by debt and need to celebrate milestones, this method can give you the boost you need to stay motivated.

Here’s how to do it:

1. Make a list of all your debts and order them from lowest to highest balance.
2. Put as much extra money as possible toward your debt with the smallest balance while paying the minimum balance on the others every month.
3. Once you pay off your smallest debt, put that monthly payment toward the next-smallest one until you’ve paid off all your debts.

Debt Snowball Example

Returning to our example from earlier, say you have the following debts: a credit card with a $5,000 balance at 20% interest, a personal loan with a $1,000 balance at 10% interest and a private student loan with a $10,000 balance at a fixed 8% interest rate. The personal loan has the smallest balance, and you’ll pay that off first despite the fact that it has a lower rate than the credit card. Next, you’ll move on to the credit card, then the student loan.

Pros and Cons of the Debt Snowball Strategy

The debt snowball has its own pros and cons, separate from the debt avalanche strategy. They are:

Pros

• Quick wins: You’ll gain momentum and stay motivated as you see smaller debts drop away. The debt avalanche method, by contrast, may require you to pay off a large debt first, which won’t offer a feeling of gratification as quickly.
• Easy to implement: It may be easier to order your debts by balance than by interest rate. You may already have a sense of your debts’ sizes, while you’d have to go searching for their interest rates.

Cons

• Less interest savings: The debt snowball method doesn’t consider interest rates; it focuses on each debt’s balance. This means you may be paying more in interest throughout the process.
• Other factors may take precedence: Similar to the debt avalanche method, the debt snowball may not take into account other reasons you could want to pay off certain debts earlier than others.

Which Debt Payoff Method Is Better?

Both strategies are strong options for eliminating debt, but the best choice for you depends on your goals and your personal approach to money. If you’re someone who finds it most meaningful to save money, the debt avalanche is a good choice. If you’d rather motivate yourself with fast wins and regular celebrations, the debt snowball is for you.

Here’s how they compare:

You may also benefit from other debt payoff strategies, either instead of or in tandem with the debt snowball or avalanche. Both require a good credit score to qualify and are generally best used to pay off credit cards.

• Debt consolidation loan: Using this strategy, you’ll apply for a personal loan that carries a lower rate than your debts’ average rates. The lender may then pay off your credit card debts and you’ll make fixed payments to your new lender until the total balance is paid off. Or the lender will disburse the loan money to you and you’ll pay off your credit cards on your own, then pay off the loan.
• Balance transfer credit card: A balance transfer credit card is similar to a consolidation loan in that you’ll move your previous cards’ balances to the new card and then make a single monthly payment to pay them off. You may even receive an introductory period of 0% interest on the card. But it’s crucial to pay off your balance before that period ends.

The Bottom Line

Once you’ve made the decision to pay off debt, you’ve already committed to an important and worthwhile financial move. When choosing the right debt payoff method, consider what will encourage you to maintain that drive: saving money or getting individual debts off the books. If you can consolidate some or all of your debts and pay them off at a lower interest rate, you may be able to reach your debt-free goals even sooner.