Debt avalanche vs. debt snowball: Here’s what you need to know

If paying down debt is in your financial forecast, there are two techniques you might want to consider: debt snowball and debt avalanche. These similar methods are a good fit if you can afford to make the minimum payments on all of your debt, plus a little extra. 

If done right, these techniques will allow you to pay down your debts more quickly and with much less interest than if you didn’t make any changes. 

Debt snowball vs. debt avalanche

The debt snowball and debt avalanche techniques are not so different from each other. With both, you make minimum payments on all your debts, but you pay an extra amount on top of that minimum toward one debt until you pay that debt off. Once that debt is paid, you take the money you were paying towards that debt and apply it to the next debt on your list. 

The main difference between the methods is the order in which you repay the debts. With the debt snowball method, you pay off your smallest debt first and then move on to your next smallest debt. With the debt avalanche method, you pay off your debts in order of highest interest rate to lowest.

The debt avalanche method will almost always save you more in interest (although not always a huge amount), but the debt snowball method may be more satisfying because it will take you less time to knock off a debt. Because of that, people who need a quick win to encourage them may be more successful with the snowball method.

You can use this calculator to see how quickly you can pay off your debt and how much interest you would pay with each method.

For either of these repayment methods to work, you need to be able to make minimum monthly payments on your existing debt, plus have room in the budget to put additional money toward your debt.

How does debt snowball work?

True to its name, the debt snowball starts with a small debt, rolling along, picking up speed, until you end up at your biggest debt. The first step in the process is to make a list of all your debts in order from smallest to largest. That becomes the order for repaying your debts.

To use some numbers, let’s assume these are your debts:

• Credit Card A: $3,500, 17.99% APR, $90 monthly payment
• Credit Card B: $7,500, 20% APR, $150 monthly payment
• Student loan: $8,000, 5% APR, $85 monthly payment
• Car loan: $15,000, 7.99% APR, $300 monthly payment

With the debt snowball method, you would pay off Credit Card A first, then Credit Card B, then your student loan and finally your car loan. 

You would continue making the minimum payments on all of your debts, except for the one with the smallest balance. For that one, you would make the minimum payment plus the predetermined extra amount you’ve decided you can afford each month. Let’s say that extra amount is $150. So toward the smallest debt, you would make the minimum payment, plus an extra $150.

Once you’ve paid off that debt, you move on to the next smallest debt on your list. Now you will also contribute the minimum payment money you were making on the previous paid-off debt, the $150, and whatever minimum payment you were making toward that debt already. You keep going that way, snowballing more and more money to put toward each debt, as you pay them off. 

How does debt avalanche work?

With the debt avalanche technique, you first list your debts in order from highest interest rate (often credit card debt) to lowest, often medical bills or student loans.

Using the same debt figures from above, with a debt avalanche plan, you would first pay off Credit Card B, then Credit Card A, then your car loan, and finally your student loan.

• Credit Card A: $3,000, 17.99% APR, $92 monthly payment
• Credit Card B: $7,500, 20% APR, $150 monthly payment
• Student loan: $8,000, 5% APR, $85 monthly payment
• Car loan: $15,000, 7.99% APR, $360 minimum payment

Like with the debt snowball method, you would pay the minimum amount on all your debts except for one. In this case, you would start with the debt with the highest interest rate and pay the minimum, plus that extra $150. Once you’ve paid off that debt, you move on to the next highest interest rate and contribute what you were paying on the debt you just paid off.

Which method is right for you?

Financially, the debt avalanche method will almost always be the most cost-effective. Using the debt figures from above, if you paid an extra $150 toward your debt each month, both the debt snowball and debt avalanche techniques would allow you to pay off your debt in about 51 months. With debt avalanche, though, you would pay $219 less in interest.

However, with the debt avalanche method, it usually takes longer to pay off those top-of-list debts, which could be demotivating. In fact, studies back this up. A Kellogg School of Management study found that people with large debt balances were more likely to stick with their debt payment plan if they started with their smaller debts first. 

The sense of satisfaction of crossing debts off your list quickly can play a big role in your success. On the other hand, if you get more satisfaction from saving money, then the debt avalanche technique might be the way to go. That’s especially true if you have a lot of high-interest debt because that’s when you’ll see the most savings.

One more option is a hybrid of the two methods. You would arrange your list of debts so that you have one or two small balance debts at the top, followed by your highest interest debt. This gives you the satisfaction of quickly knocking out a small debt or two, but then lets you tackle your debts with high interest rates.

Regardless, both methods will save you much more time and money than if you only made the minimum payments on your debt and made no other changes. Using the debt figures from above, you would pay off your debt six years earlier and save more than $7,500 in interest with the snowball and avalanche techniques. That’s definitely more than pocket change.

Related Article: This man paid off $46,500 in student loans in two years with this one simple trick