Debt Snowball or Debt Avalanche: Which Method Is Right for You?

First things first: List your debts

The first step to paying off debt is to figure out exactly what you owe. Make a list of all your debts, including any balances on credit cards, personal loans, student loans, and car loans. Include the interest rate for each loan in your list.

The one thing to leave off your list? Your mortgage. “The average homeowner is locked in at a mortgage interest rate that is lower than revolving credit rates,” says Kevin Kleinman, financial advisor. “Putting extra money towards a loan with a higher rate makes more sense than putting it towards a mortgage fixed at 4% or lower.”

Here's an example of what this list could look like: 

Organizing your debts can make it easier to decide how to pay them off. (Table for illustrative purposes only.)

Once you have made your list, figure out your monthly expenses. How much do you spend on food, utilities, rent or mortgage payments, and minimum payments on all your debts? Remember, you need to pay at least the monthly minimums on all your loans, or your credit score could suffer.

Add up those numbers and subtract it from your monthly net income (your take-home pay). Let’s say that after accounting for your expenses and setting aside a little money for savings, you have $300 left over to pay down your debts. Now you’re ready to decide how to use that money.

What is the debt avalanche method?

The debt avalanche method means paying off debt with the highest interest rate first. Because you are prioritizing your most expensive loans, this method is the most cost-effective way to pay down debt.

In the example above, you would start with the credit card because 18% is the highest interest rate.

Using the debt avalanche method, you would pay your monthly minimums. Then you would put the extra $300 you have after paying your expenses toward the credit card until it was paid off. Once the card is paid off, you would put that extra money toward the car loan.

With this method, you go from the highest rate and proceed to the lowest, like an avalanche falling down a mountain.

What is the debt snowball method?

The debt snowball method means paying off your smallest debt first. Look at your list of debts and find the smallest balance amount—don’t focus on the interest rate.

In our example, the debt snowball method would start with the car loan, since the $7,500 balance is the smallest. After paying your monthly minimums on all your loans, you take your extra $300 and put it toward that car loan balance. This lets you pay off that balance faster.

Once that debt is gone, you would use any extra money in your monthly budget ($300 plus what you had been paying on the car loan) to pay down your next smallest balance. In our example above, that would be the personal loan. After that, the credit card.

With the debt snowball method, your payments “snowball” as you knock out smaller debts first and tackle larger debts over time. This method might cost you more money in interest in the long run, but some people benefit from the more immediate sense of accomplishment it provides.

Which method is better—snowball or avalanche?

It depends. The benefit of the snowball method is the good feeling you get from paying off a debt. “We should note the tremendous psychological benefits of paying off debt,” Kleinman says. “Debt could be holding someone back at work without them even realizing it. For example, employee performance could suffer, which may hurt job prospects or dampen earning power,” he adds.

In other words, getting rid of debt feels good and can give you motivation to keep going.

But saving money is a worthy goal, too, which is what the avalanche method allows you to do. Paying off the highest interest rates first means saving money in interest charges over time. The downside is it can be hard to maintain momentum when the gratification you get from paying off debt is delayed.

Comparing methods side by side

There are pros and cons to the debt snowball and the debt avalanche method, so looking at them together can help you determine which one could work best for your situation.

“If you have self-discipline, self-organization skills, and the cash flow to make it work, the avalanche method is certainly for you. If you don't have those things, you're more likely to achieve success with the snowball method,” Kleinman says.

You can refer to this summary of the pros and cons of each method to see which will work best for you: 

Depending on your approach to money, either the debt snowball or avalanche method could work for you.

3 keys to debt management success

Paying off higher-interest debt is critical for financial health. The most important thing is to pick a debt management strategy and stick with it.

Whatever method you choose, keep in mind these three keys to success:

1. Be honest with yourself. Ask yourself: How much motivation do I need? Do I need some quick wins to keep going? There is no right or wrong answer. Whatever works best for you is the method to use.
2. Don’t take on more debt. Be sure not to increase the amount of money you owe. It’s hard to pay off a credit card balance if you’re adding to it.
3. Consider debt consolidation. Reducing higher-interest debts by consolidating them into one lower rate personal loan could help you regardless of which method you choose. You could save money on interest and make your monthly payments more manageable.

No matter which debt payoff strategy you choose, paying off debt is good for your mental and financial health. Your dedication may give you peace of mind, open up new financial possibilities, and bring a more rewarding future.

Want to know how a debt consolidation loan could help you pay off debt faster?