Debt snowball vs. debt avalanche method

Debt can accumulate overnight, but it can take much longer to pay it off. Getting out of debt takes time and effort, but there are two ways you can do it: the snowball method and the avalanche method.

Both methods assume you owe money to multiple lenders. If you only owe money to one lender, focus on paying them back as much as possible and as quickly as possible to avoid paying unnecessary interest charges.

Both the snowball and avalanche methods have pros and cons, so here’s everything you need to know about these two debt payoff strategies, along with examples.

Key takeaways

By learning about the snowball and avalanche methods, you can determine which strategy best aligns with your goals and learn how to budget to get out of debt. Here’s a quick overview of what you need to know:

• The snowball method involves paying off the smallest debts first, regardless of interest rates

• Using the avalanche method, you attack debts with the highest interest rates first, saving money on interest payments over time

• Snowball payouts can provide you with quick wins to motivate you

• Avalanche payouts are more efficient if you are disciplined enough to stay the course.

The debt snowball method

Do you remember making snowballs when you were a kid? First you place a small ball of snow in your hands, and if you are lucky enough to be on a hill, you will let the snowball roll, watching it collect snow all the way until it becomes a giant snow boulder. This is how the debt payoff snowball method works.

It involves paying as much money as possible toward your smallest debt, regardless of the interest rate, while maintaining minimum payments on your other debts. Once you pay off the smallest debt, you can roll over the money you were paying on that debt into your payment on the next smallest debt. Once you pay this amount, you transfer this amount to the next amount, and so on. This way, you’ll continue to increase the amount you pay on your smallest debts, eliminating them one by one, as your payments “snowball” into faster debt repayment.

How to pay off debt using the snowball method

Here’s how to implement the debt snowball method:

1. Start by listing all types of debts and accounts from the smallest balance to the largest balance.

2. Always make the minimum monthly payments on all debts.

3. Focus on extra payments on smaller balances.

4. Attack the smallest stocks first.

5. Take the money you were setting aside for the paid-off debt now and apply it to the next smaller balance.

6. Repeat until all debts are paid.

The debt snowball method is very popular with people with relatively low incomes and multiple debts.

Example of a debt snowball

The table below lists four notional debts, from smallest balance to largest balance. Using the debt repayment snowball method, you can pay off these debts in this order while maintaining the absolute minimum payments.

In this example, you would handle your debt as follows:

1. Invest as much money as you can to pay off credit card #1 while continuing to make minimum payments on the rest of your debt. Let’s say you can pay an extra $50 each month on top of the minimum payment of $60, for a total of $110.

2. Once credit card #1 is paid off, you move onto your auto loan, paying $235 each month ($110 monthly payment for credit card #1 + $125 minimum payment on your auto loan).

3. Once the car loan is paid off, you’ll move to credit card #2, paying $385 per month ($125 monthly car loan payment + $235 in prepaid debt)

4. Once Credit Card #2 is paid off in full, you will put $565 toward your student loan ($385 of prepaid debt + $180 minimum student loan payment).

Here is the detail:

• Credit Card No. 1: Payment in month 22

• Car loan: Payment in month 35

• Credit Card No. 2: Payment in month 43

• Student loan: Payment in month 49

You can speed up the process by paying extra toward your lowest balance when your budget allows.

Pros and cons of the debt snowball

Credit Canada credit counselor Anna Guglielmi believes the debt snowball method can have some powerful psychological effects on individuals struggling with debt.

“The idea of ​​tackling your debts quickly is attractive and motivating. This method is useful for people who need to make smaller gains and are motivated to manage fewer accounts.”

Anna Guglielmi, Credit Consultant, Credit Bank Canada

Here are some other benefits of the debt snowball:

• Quick wins keep you motivated.
• It is easy to track and manage multiple debts.
• It ensures that you make the minimum payments.
• Builds momentum.

The snowball method can keep you motivated and help you avoid paying off debt by using a line of credit or balance transfer credit card. However, there are some potential disadvantages, which include:

• It will not necessarily result in interest savings.
• Longer payment time.

It also doesn’t leave much room to save for the future — you’re supposed to allocate most or all of your extra money to the smallest debt on your list.

Debt collapse method

You may think it makes sense to pay off the debt with the highest interest rate first. In some cases, this is done, known as the debt avalanche method.

Also called the debt stacking method, the avalanche method involves keeping all your debts to a minimum, but paying as much money as you can toward the debt with the highest interest rate first — regardless of how much money you owe. While getting rid of your first debt may take longer depending on how high the balance is, you will potentially save hundreds, if not thousands, of dollars in interest fees over the long term.

How to Pay Off Debt Using the Avalanche Method

Here is a step-by-step breakdown of the debt collapse method:

1. Break down your debts and rank them in order from highest to lowest interest rates

2. Continue making minimum payments on personal loans, credit card debt, and other accounts

3. Direct as much extra money as possible toward the debt with the highest interest rate

4. Continue this process until you have paid off all debts.

The debt avalanche method can help you address bad debts first by prioritizing accounts with the highest interest rates. It lets you protect your credit score too, provided you pay the minimum balance on all your accounts.

Example of a debt snowball

By following the debt avalanche method, you can pay off your debts in the following order, while keeping the absolute minimum payments:

In this scenario, you should do the following:

1. Invest as much money as you can to pay off credit card #1 (since it has the highest interest rate) while making minimum payments on the rest of your debt. Let’s say you can pay an extra $50 each month on top of the minimum payment of $60, for a total of $110.

2. Once Credit Card #1 is paid off in full, you will pay $260 towards Credit Card #2. ($150 minimum payment for Credit Card #2, plus $110 in prepaid debt).

3. Once Credit Card #2 is paid off in full, you’ll pay $385 toward your auto loan ($125 auto loan payment, plus $260 in prepaid debt).

4. Finally, once your car loan is paid off, you’ll pay $565 toward your student loan. ($180 student loan payment, plus $385 in prepaid debt).

Just like in the snowball method, once you pay off one debt, add that monthly payment to the next debt you take on. It’s called the avalanche method because your efforts are compounded by the money you save in interest, so your debt gets smaller while your payments get larger.

Here’s how it works:

• Credit Card No. 1: Month 22

• Credit Card No. 2: Month 40

• Car loan: Month 42

• Student loan: Month 48

You can speed up the process by allocating more to the debt you’re currently working on.

If you use the snowball method, you’ll pay $4,980 in interest fees, while using the avalanche method, you’ll pay $4,800, saving you $180.

Pros and cons of debt collapse

An avalanche of debt allows you to “save more money in the long run, but you may have to wait a little longer to see individual accounts paid in full,” Guglielmi says. Applying the avalanche method requires patience, focus, and trust in the process.

Here are some advantages of the debt avalanche method:

• More efficient
• Save more money on interest in the long term
• Shortens the overall repayment schedule by reducing interest accrual

The avalanche method can also help you pay off debt without hurting your credit score, as you’ll make the minimum payments on all accounts while putting an extra amount toward your higher-interest debts.

However, there are some downsides to the avalanche approach as well. For example:

• It requires more discipline, especially early on
• Progress may seem slower

Eliminating high-balance credit card debt or student loan debt can take years, even though you’ll save on interest.

Not sure if you should try a snowball, avalanche, or something different, like a debt consolidation loan? A head-to-head debt snowball and debt avalanche comparison will help you decide.

Snowball or Avalanche: Which is Better to Eliminate Debt?

Which method is right for you? Our debt calculator can help you figure this out, but it really comes down to your personality and financial goals. While the avalanche method is suitable for saving money over the long term (and is often the preferred option for Type A personalities), many prefer the snowball method because paying off the smallest debts first creates quick gains up front, which is really motivating for some people and helps them stay on track. right to pay off their debts.

So what do the experts say? According to a field study where consumers used both methods, Journal of Consumer Research It reveals that the snowball method is more likely to lead to success due to the psychological benefits and instant gratification associated with paying off the entire debt balance more quickly. But if you’re looking for the best of both worlds (paying off debt faster and saving on interest), debt consolidation may be your best option. Whatever you choose, remember that the only wrong way to pay off debt is not to pay it!

If you’re not sure which method to choose, contact Credit Canada for a free credit counseling session. Our certified credit counselors will guide you through your debt repayment options and help you determine the best strategy for your situation.

Get debt help now or call 1(800)267.2272 to get started.