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Credit Card Basics. Debt Repayment Options and Advice. Table of Contents Expand. Debt Avalanche vs. Debt Snowball. Debt Avalanche. Special Considerations. Debt Snowball FAQs. The Bottom Line. Debt Snowball: An Overview Paying off debt is no easy task, especially if you just pay the minimum amount due each month. Key Takeaways Debt avalanche and debt snowball are both types of accelerated debt repayment plans.
The debt avalanche method involves making minimum payments on all debt, then using any extra funds to pay off the debt with the highest interest rate. The debt snowball method involves making minimum payments on all debt, then paying off the smallest debts first before moving on to bigger ones. The debt avalanche method can result in paying less interest over time but requires discipline.
The debt snowball method can be more expensive but yields quicker results—valuable for maintaining motivation. Pros Minimizes the amount of interest you pay Lessens the amount of time it takes to get out of debt. Cons Takes discipline and commitment to pull off Requires constant amount of discretionary income. Pros Builds motivation by settling debts fast Easy to implement. Cons Incurs more interest—more expensive overall Can take longer to become completely debt-free.
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We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Related Articles. Partner Links. A strategy for becoming debt-free, the debt snowball starts with paying off the smallest debt first and working up from there. What's a Debt Avalanche? Debt in the yellow zone has lower interest rates, is generally longer term and might have some tax advantages, such as a home equity line of credit, federal student loans, both of which have some deductibility.
Lyman would also include auto loans in this category, because many people decide to carry them instead of paying off cars in full. Green- one debt is the longest term with the lowest interest rates, and anything that's helping you build an asset, according to Lyman.
Another way to think about prioritizing what debt to pay off is thinking about the ones that weigh on you the most, according to Delano Saporu, CEO of New Street Advisors Group, a financial planning and portfolio management firm in New York. This is often consumer debt from credit cards, making that the best place to start, he said. Considering the pandemic, some may also be dealing with other kinds of debt that doesn't necessarily come with interest rates but could have a great impact on their lives, such as owing months of rent.
That's also debt that should be a top priority, according to Saporu. Once you've categorized your debt and know what you'd like to focus on paying off first — while making minimum payments on all other debts, of course — you then need to decide on a repayment strategy. Before you begin to allocate part of your budget to repaying debt, financial experts recommend that people build up at least a small emergency savings fund. Those who have carried significant debt know how stressful it can be to live with this extra financial weight, especially if you carry multiple types of debt.
We asked five experts to weigh in on what you should pay off first. All five experts we spoke to emphasized the importance of having a baseline level of savings before tackling debt head-on.
Often called an emergency fund or rainy day fund, these savings can shield you from the worst consequences of unforeseen expenses. Putting all of your funds toward debt before you have savings could end up setting you back. Without savings, an emergency like an injury or your car breaking down could put you into further debt. This is not to say, of course, that you should stop paying off debt entirely until you get an emergency fund.
Experts tend to fall in competing camps over what debt payoff strategy works best. The debt avalanche approach is when you first focus on paying off the debt with the highest APR annual percentage rate, which is the interest rate plus lending fees.
Then, once that is paid off, you move onto the card or account with the next-highest APR. This method results in the most amount of money saved in interest, and generally, this method prioritizes credit cards and personal loans over student loans, which often have the lowest interest rates of any type of debt.
Whatever method you choose to pay off your debt, make sure it aligns with your lifestyle and is something you can stick with for the long term. On the other hand, the debt snowball approach prioritizes the account with the lowest balance, before moving on to the account with the next-lowest balance. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site.
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With all these outstanding balances, which debt should you pay off first? While you should always make at least the minimum monthly payment on every debt you owe, it can be hard to know how to prioritize any extra debt repayment dollars each month. While paying off your highest-interest debt first is a common strategy, there are benefits to tackling your smallest debt first, regardless of interest, and working your way up to your largest debt.
Credit cards with higher-than-average APRs can be especially hard to pay off, and anyone with a student loan or mortgage knows the frustration of making monthly payments that only go toward the interest, not the principal. If you want to get rid of that high-interest debt as quickly as possible, start focusing your debt repayment efforts on your highest-interest debt first. This is commonly referred to as the avalanche method.
Keep making the minimum monthly payments on all of your credit cards and loans, but put every extra penny you can toward the card or loan with the highest interest rate. The avalanche method might also be discouraging if you have a large debt, since paying it off could feel impossible. While some people choose to address their debt based on interest rate, others pay off their smallest debt first and work their way up to the largest one.
This debt repayment method, popularized by financial guru Dave Ramsey, is called the debt snowball because it starts small and grows over time. You might end up paying more in interest than you would have paid if you tackled your highest-interest debt first, but the psychological benefits of getting those smaller debts paid off as quickly as possible can be very rewarding.
To get started with your debt snowball, list all of your current debts — and their current balances — from low to high. Continue to make the minimum monthly payment on all of your debts while putting as much extra money as possible toward your smallest debt.
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