Debt Avalanche vs Debt Snowball: Which Debt Payoff Strategy Is Right For You?

So you’ve made the decision to start your debt payoff journey. How are you going to pay? What’s your plan? Your payoff schedule? Read on to learn about how to choose your debt payoff strategy.

Debt Avalanche vs Debt Snowball: Which Debt Payoff Strategy Is Right For You?

The average American has $90,460 in debt. Carrying this amount of debt impacts your credit score, your access to different financial products, your ability to purchase big-ticket items, and your mental health. The longer you carry this debt, the more you end up paying—depending on the interest rate, you could be paying more on interest than on the actual principal.

If you’re ready to make some decisions, pull up all your debt balances, write their total balance, their interest rate, and the minimum payment. You’ll need this information when finalizing your plan. Here are two debt payoff strategies for you to choose from.

Debt Avalanche

An avalanche starts at the peak of a mountain. Similarly, the debt avalanche strategy starts with the debt that has the highest interest rate, and proceeds from highest to lowest.

If you implement this strategy, you would:

  • Pay the minimum on all debts
  • Pay extra on your debt with the highest interest rate

This debt payoff strategy is the most efficient when it comes to saving money, since you are tackling the debt with the highest interest rate, AKA the debt that you are paying off significantly slower when only paying the minimum.

Let’s say you have three different debts:

  • Student loan: $20,000 at 4.5%
  • Credit card debt: $10,000 at 15%
  • Auto loan: $7,000 at 2%

Under the credit avalanche method, you would first tackle your credit card debt, since it has the highest interest rate at 15%. Use this calculator to see just how much faster you would pay off your credit card under this debt payoff strategy. If you have a lot of internal motivation, are very analytical and strategic, and are easily committed to your debt payoff strategy, this might be the best method for you.

Debt Snowball

A snowball starts small and grows in size as it progresses. Similarly, this debt payoff strategy starts with the smallest debt you have, prioritizes it, and re-prioritizes as you pay off debts.

If you implement this strategy, you would:

  • Pay the minimum on all debts
  • Pay extra on your smallest debt

While this will not save you the same amount of money in interest payments, this debt payoff strategy works best for those who may be more extrinsically motivated. By throwing extra money at the smallest debt, you will be decreasing the number of debts you have faster. Each debt you pay off will be a reward for you to continue on your debt payoff journey. So if you had the following debts:

  • Student loan: $20,000 at 4.5%
  • Credit card debt: $10,000 at 15%
  • Auto loan: $7,000 at 2%

you would first start off with your auto loan, since it is the smallest debt by $3,000, when compared to the credit card debt. Note that this debt doesn’t have the highest interest rate, but it does have the smallest balance.

Paying off debt isn’t fun. Finances, really, aren’t always fun. So when picking a debt payoff strategy, choose the strategy that makes the most sense for 1) your lifestyle and 2) your mental health.

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