Debt Snowball vs Debt Avalanche: What is the Difference?

What Is the Debt Snowball Method?

The debt snowball method is a strategy designed to build psychological momentum by focusing first on small, manageable wins. The basic principle involves organizing your debts in order of their size, from the smallest to the largest, without taking the interest rates into consideration.

While making all the minimum payments on your debts, you direct all extra funds toward paying off the smallest balance. Once you have paid off the entire debt, you then direct the money into the next smallest debt. This momentum creates a “snowball” effect, and the amount available for repayment continues to grow as you pay off each debt.

It might be appealing if you find staying motivated a challenge and want to eliminate smaller debts quickly to reinforce a sense of progress and accomplishment.

Example of Snowball Method

Let’s take a closer look at an example of a debtor using the snowball method. We’ll use Alex as an example.

Alex has the following debts:

• $500 (credit card at 20% interest; minimum payment $50)
• $1,500 (medical bill at 7% interest; minimum payment $100)
• $3,000 (car loan at 10% interest; minimum payment $150)

When it comes to what debts to pay off first using the snowball method, Alex focuses on paying off the $500 credit card debt first because it has the smallest balance.

Alex makes only the minimum payments on the two other debts and directs all extra funds towards paying off the $500 credit card debt.

He can pay $250 a month on top of the minimum payment of $50, so he pays off a total of $300 per month. Doing this, it takes him two months to clear the debt.

He then starts to pay off the next smallest debt, which is his medical bill. He now has $300 to put towards his medical bill, in addition to the $100 minimum payment, so he can pay off a total of $400 per month.

Once he has paid this off in about four months, he can use this $400 to pay off the car loan, plus the $150 minimum payment he has been paying. So he can now pay off $550 per month until the debt is cleared.

With each debt, the total amount available to Alex for repayment increases. As this snowball effect builds, it gives Alex motivation and a sense of satisfaction as he sees his debts disappear one by one.

What Is the Debt Avalanche Method?

The debt avalanche method is also used to pay off several debts, but it focuses on financial efficiency by paying off the higher interest-rate debts first.

This minimizes the total interest paid, which could potentially lead to faster overall debt repayment and cost savings.

With this method, you should organize your debts in descending order, based on the interest rates, from the highest interest rate to the lowest, without taking the size of the debt into account.

As with the snowball method, you must continue to make the minimum payments on all your debts. Once this debt is fully paid off, you apply the funds to the debt with the next highest interest rate.

While it is more cost-effective, it can require more discipline and patience, and progress can feel slower because you may tackle a larger debt first.

Example of Avalanche Method

Let’s go back to Alex’s debts and see how he would use the avalanche method to pay them off:

• $500 (credit card at 20% interest; minimum payment $50)
• $1,500 (medical bill at 7% interest; minimum payment $100)
• $3,000 (car loan at 10% interest; minimum payment $150)

Alex again begins with his credit card debt because this has the highest interest rate. He pays $250 a month plus the $50 minimum payment, while making the minimum payments on the other debts.

However, after paying off the credit card debt, he moves on to the car loan, which has a 10% interest rate.

He now has $300 a month to pay off the car loan, plus the minimum payment of $150, so he pays $450 per month while continuing to make the $100 minimum payment on the medical bill.

It takes him about seven months to pay off the car loan, and then he moves on to the medical bill, which has the lowest interest rate.

He has already paid off a large amount by making the minimum payments, and the debt has grown slower than the other debts because of the lower interest rate. He continues making payments until it is fully paid off.

With this method, Alex continues to pay off multiple debts for a longer period of time, so it has taken longer to see visible results. However, he has enjoyed cost savings by focusing on the highest-interest debt.

Comparing Snowball and Avalanche Methods: Pros and Cons

Which debt repayment strategy you choose depends on your priorities and your individual circumstances.

Both debt pay-off methods have advantages and challenges, so it’s important to understand how each one aligns with your goals by looking at their strengths and weaknesses so you can make an informed decision.

Pros and Cons of the Debt Snowball Method

The debt snowball method puts the focus on momentum by quickly paying off smaller debts, giving you a motivational boost.

Pros	Cons
Psychological Wins: Eliminating smaller debts provides quick satisfaction, boosting motivation.	Higher Overall Cost: Ignoring interest rates can result in paying more over time.
Easy to Implement: Simple and straightforward strategy to follow.	Slower Debt Elimination: Larger, high-interest debts may take longer to clear.
Consistent Progress: Clearing smaller debts creates a sense of momentum.	Less Cost-Efficient: May not be ideal for those prioritizing financial savings.
Builds Confidence: Helps overcome feelings of being overwhelmed and improves confidence.

Table 1: Pros and cons of the debt snowball method

Pros and Cons of the Debt Avalanche Method

The debt avalanche method maximizes cost savings by taking on the high-interest debts first, providing long-term financial benefits.

Pros	Cons
Reduce Total Interest Paid: By targeting the most expensive debts first, you lower the overall borrowing cost.	Requires Discipline: Progress can feel slow initially, requiring more patience.
Faster Debt Elimination: Less interest accrues, which can shorten the timeline to becoming debt-free.	Lacks Immediate Rewards: You may not experience the quick wins seen with the snowball method.
Financially Efficient: Every dollar works harder to reduce overall debt.	More Complex: Requires tracking interest rates and prioritizing payments carefully, which can be challenging.
Useful for High-Interest Debt: Particularly beneficial for large debts with high-interest rates, potentially saving significant money.

Table 2: Pros and cons of the debt avalanche method

Here are the main differences and purposes of the debt snowball method and the debt avalanche method.

Feature	Debt Snowball	Debt Avalanche
Focus	Smallest balance first	Highest interest rate first
Psychological benefit	Quick wins	Long-term savings
Best for	Motivation-driven	Financially driven
Interest savings	Lower	Higher
Time to debt-free	Potentially longer	Potentially shorter

Table 2: Pros and cons of the debt avalanche method

Choosing What is Right for Your Financial Situation

In this section, we’ll take a closer look at what you need to consider when choosing a method, along with other debt management options that may be suitable for your specific financial situation.

What to Consider When Choosing a Method

Motivation, interest costs, and budget flexibility can influence the effectiveness of your preferred debt repayment method:

Motivation

Your ability to stay motivated will be crucial. Would you prefer quick wins and the satisfaction that comes with eliminating small debts? If so, the snowball method may be more effective for you. But if you are more motivated by long-term financial efficiency, the debt avalanche method may be a better option.

Interest Costs

If you have one or a few high-interest debts that make up a large portion of your total debt, it may be a more strategic choice to choose the avalanche method. You can target these debts first to minimize your total cost of borrowing and speed up your path to becoming debt-free.

But if you do not have any large debts with high-interest rates, or the difference between the rates is not substantial, you may prefer the psychological motivation the snowball method offers.

Budget Flexibility

If your disposable income is limited, it may be best to choose a method that will keep you motivated. The snowball approach can help you to stay consistent, even if you are unable to make large payments.

However, if you can make larger or more frequent payments, the avalanche method could make a more noticeable difference by reducing the interest and speeding up the overall repayment time.

Explore Other Debt Management Options

The snowball and avalanche debt methods are both powerful strategies to tackle debt, but they are not the only options. You may benefit from exploring other strategies, like debt consolidation, balance transfers, and debt management plans, to simplify payments and reduce interest rates.

Debt Consolidation Loans

A debt consolidation loan (link) is where you combine several debts into a single loan with a fixed interest rate and a single monthly payment.

This can help to simplify the repayment process so that it is easier to track your progress and manage your payments, and it can help to reduce the overall cost of your debts while giving you peace of mind. However, be aware that the terms and interest rate of the consolidation loan might be impacted by your credit score.

Balance Transfer Credit Cards

If you have several credit card debts to pay off, you may want to apply for a balance transfer credit card. These have introductory periods with 0% interest, so you can focus on paying down your balance without your debt increasing.

These cards usually come with fees, however, which are often equal to a percentage of the balance you transfer, and the promotional interest rate is only temporary. Feel free to compare balance transfer vs. personal loan to determine the right course of action.

Debt Management Plans (DMPs)

A DMP is a structured program set up by a credit counselor who works on your behalf. They negotiate with your creditors to reduce the interest rates, potentially waive fees, and generally establish payment terms that are more manageable for you.

You usually make one monthly payment that is distributed to your creditors, but be aware that this option might have an impact on your credit score.