Understanding Your Debt Repayment Options

When it comes to paying off debt, two popular methods stand out: the debt snowball and the debt avalanche. Both strategies aim to help you become debt-free faster, but they approach the process differently. Choosing the right one depends on your financial situation and psychological preferences.

What is the Debt Snowball Method?

The debt snowball method focuses on paying off your debts from the smallest balance to the largest, regardless of interest rate. You make minimum payments on all debts except the smallest, to which you allocate any extra money. Once the smallest debt is paid off, you roll that payment into the next smallest debt, creating a “snowball” effect.

What is the Debt Avalanche Method?

The debt avalanche method targets debts with the highest interest rates first, regardless of their balance size. You pay minimums on all debts but put extra funds toward the highest-interest debt. Once that is cleared, you move to the next highest interest rate debt, minimizing the total interest paid over time.

Debt Snowball vs Debt Avalanche: Real Example Comparison

Let’s compare the two methods using this example:

You have an extra $200 each month to put toward debt repayment.

1. Debt Snowball:
   • Focus on Credit Card A ($500) first.
   • Pay $25 minimum + $200 extra = $225 monthly to Credit Card A.
   • Credit Card A paid off in ~3 months.
   • Next, roll $225 into Credit Card B payments: $50 + $225 = $275 monthly.
   • Credit Card B paid off in ~8 months.
   • Finally, apply $275 to Personal Loan ($100 + $275 = $375 monthly) until paid off.
2. Debt Avalanche:
   • Focus on Credit Card A first (18% interest).
   • Pay $25 minimum + $200 extra = $225 monthly to Credit Card A.
   • Credit Card A paid off in ~3 months.
   • Next, focus on Credit Card B (12% interest): $50 + $225 = $275 monthly.
   • Credit Card B paid off in ~8 months.
   • Finally, pay Personal Loan ($100 + $275 = $375 monthly).

In this example, both methods start with the same debt, so initial progress is similar. However, if the smallest debt had a lower interest rate than another, the outcomes would differ more noticeably.

Which Method Saves You More Money?

The debt avalanche method typically saves you more money in interest because it targets higher-interest debt first. Over time, this reduces the amount of interest you pay, potentially saving hundreds or thousands of dollars.

Which Method Works Better Psychologically?

The debt snowball method offers quicker wins by eliminating smaller debts fast. These early successes can boost motivation and help build momentum. For people who struggle with staying motivated, this emotional payoff can be invaluable.

How to Choose the Right Method for You

• If you get motivated by quick wins: Choose the debt snowball.
• If you want to minimize interest paid and are disciplined: Choose the debt avalanche.
• If your debts vary widely in balance and interest rate: Analyze which debts make the biggest financial impact.
• Consider your personality and temperament: Staying motivated is key to success.

5-Minute Action Today: Start Your Debt Repayment Plan

1. List all your debts with balances, interest rates, and minimum payments.
2. Decide your extra monthly budget for debt repayment.
3. Pick your preferred method: snowball or avalanche.
4. Order your debts accordingly (smallest to largest for snowball, highest to lowest interest for avalanche).
5. Set up automatic payments prioritizing your chosen order.

Taking these steps today puts you on the path to financial freedom.

Common Mistake to Avoid

Ignoring minimum payments on other debts: Some people focus all extra money on one debt but miss minimum payments on others, which can cause fees and damage credit scores. Always pay minimums on all debts before allocating extra funds to your target debt.

Read Next

• How to Create a Budget That Supports Debt Repayment
• Understanding Credit Scores and How Debt Affects Them
• Building an Emergency Fund While Paying Off Debt