Debt snowball vs. debt avalanche method: Which payoff strategy is best for getting control of your debt?
Credit card, mortgage and other debt balances are on the rise, thanks in part to a combination of inflation and high interest rates. Credit card balances were particularly affected, increasing by 5.8% in the year up to August 2024, with mortgages, home equity loans and car loan balances also seeing a bump.
If you’re one of the many Americans carrying a higher debt balance than you had a year ago, it might be time to start paying it down strategically.
Here’s where the debt snowball and debt avalanche methods come in. These debt strategies provide a simple structure to pay off what you owe across multiple credit accounts, one debt at a time. Which method is best for you ultimately depends on the type of debt you have and how you’re typically motivated to see a plan through to success. In many cases, you may want to combine methods or other debt repayment strategies, such as debt consolidation.
Debt snowball method: What it is and how it works
With the debt snowball method, you order your debts by size of outstanding balance and make minimum payments, putting any extra money in your debt-payoff budget toward your credit account with the smallest balance. As you pay off one balance, you put your extra money toward the next smallest debt on your list until all debts are paid.
This method allows you to pay off smaller debts and close accounts more quickly than other methods, setting you up for a series of quick wins in the beginning — especially if you have a mix of low- and high-balance accounts.
The main advantage of the debt snowball method is that it’s motivating. If debt makes you anxious, or you’ve been discouraged by debt repayment strategies in the past, this may be a good method to start with — even if you switch to the avalanche method later. The psychological reward of this method could be enough to keep you going when others failed you.
Another advantage is that it reduces the number of monthly payments you have to make more quickly than the debt avalanche method. This means that you’ll have more money to put toward your next account more quickly, accelerating the process. However, even with the extra money to pay down your accounts, it still may not offer as much interest savings as the debt avalanche method.
Debt avalanche method: What it is and how it works
With the debt avalanche method, you order your debts by interest rate and make minimum payments, putting any extra money in your debt-payoff budget toward the credit account with the highest APR. As you pay off one balance, you put your extra money toward the next largest interest rate on your list until all debts are paid.
This method allows you to avoid paying more than you need to on interest, since interest accumulates more quickly on high-APR accounts. You can generally benefit from this the most when you have accounts with a wide range of APRs — especially across different types of debt, like personal loans and credit cards.
Another advantage is that the debt avalanche method may help you get out of debt more quickly than the debt snowball method. That’s because it stops your highest-interest debts from accumulating interest as quickly as they would without targeted payments.
The main disadvantage of the debt avalanche method is that it can be more difficult to stick with — especially if your high-interest accounts also have the highest balances. That’s because it can feel like you’re not making any progress if it takes over a year to pay down your first account, and that can make you want to quit.
That’s why many people start with the debt snowball method for the first few months and then switch over to debt avalanche — especially if they have several accounts with low balances.
Dig deeper: Top tips for paying off your credit card debt — from a financial expert
Debt snowball vs. debt avalanche method: Step by step
Getting started with the debt snowball or debt avalanche method involves the same steps with one key difference: which accounts you prioritize. Here’s how it works.
Step 1: List out your credit accounts
Make a list of all of your credit card accounts and loans — ideally in a spreadsheet. Include columns for each balance, APR and minimum monthly payment required to avoid fees or penalties.
???? Expert tip: How to avoid prepayment penalties
If you’re including personal loans on your list, confirm with your creditor that it doesn’t charge a prepayment penalty. A prepayment penalty is a fee lenders charge when you repay a loan early, effectively canceling out any interest savings. Prepayment penalties aren’t common, but they do exist. And if you’re on the hook for this fee, don’t include these types of loans in your debt payoff list — you’ll save more money by prioritizing other accounts.
Step 2: Rank your accounts
This is the only step where the debt snowball and debt avalanche diverge:
Step 3: Budget extra payments
Take stock of your monthly income and expenses. Be sure to include minimum monthly payments on all accounts and contributions to savings accounts — such as your emergency fund and retirement contributions.
Note how much money you have left over after expenses, and dedicate a portion of those funds toward extra payments on your accounts — your smallest balance for debt snowball, or your highest interest rate for debt avalanche.
Step 4: Pay down your accounts
Schedule extra monthly payments for your top priority account while continuing to make the minimum monthly payments toward all other debts on your list. Once you’ve paid down your focus debt, use the money you’d budgeted for payments toward the next priority account on your list. Continue this way down your list until you’ve paid off your accounts — and you’re debt-free!
Dig deeper: Top debts to prioritize paying off before retirement
Examples: Debt snowball vs. debt avalanche
The best way to get a sense of how these repayment strategies compare is to look at a few examples.
Example 1: Similar balances, different rates
Say you’re paying off a credit card, a personal loan and a car loan and have $100 to put toward an extra payment. They all have a similar balance, but because they’re different products, the interest rates vary dramatically.
Let’s take a look at the timeline and savings it would take to pay down the debt with the smallest balance versus the debt with the highest APR:
In this case, the avalanche method may seem like a clear winner for most people. It’ll take more than a year to pay down your accounts regardless of which method you choose, and the avalanche method savings are difficult to ignore. Beyond that, if you don’t choose to pay down your credit card first, that credit card balance will continue to grow while you’re paying down the personal loan, and you could likely owe thousands more. For example, if you continued making only minimum monthly payments, you’d pay a total of $6,378 in interest by the time you paid off your card balance.
Example 2: Similar rates, different balances
Say you have several credit cards with varying levels of debt and $100 to put toward an extra payment. Because they all have variable interest rates and your credit score was roughly the same when you opened the accounts, they all have about the same interest rate.
Let’s take a look at the timeline and savings it would take to pay down the debt with the smallest balance versus the debt with the highest APR:
Neither debt repayment strategy is an ideal choice here, but the avalanche method has an advantage. It’s true that using the snowball method would give you an easy win, but it would allow your $5,500 credit card to grow rapidly, meaning it’d take more time to pay off by the time you get around to it. However, the 42 months it would take to pay down your highest-interest account — that’s three and a half years — may be discouraging. Following the debt avalanche account also doesn’t account for the fact that the card with the second-highest APR has a balance that would continue to rapidly grow during this period.
In this situation, you might want to consider consolidating your debt with either a balance transfer credit card or a personal loan, using the funds to pay down your credit card accounts. Balance transfer credit cards typically offer a 0% APR introductory rate, which can last from 12 to 18 months, meaning that you won’t have to worry about accumulating interest during that period.
If you don’t think you can pay down your debt within a credit card’s introductory period, debt consolidation with a personal loan may be a better option. Personal loans generally have lower interest rates than credit cards and give you one fixed monthly payment over a term of around three to five years.
To qualify for either option, you need a good credit score of at least 670 and a debt-to-income ratio below 50%.
Dig deeper: What is a debt consolidation loan — and how can it help you lower your interest rate?
Example 3: Different rates, different balances
Say you have a HELOC in repayment with 10 years left on the term, a car loan and one unpaid credit card account. You have $100 to put toward an extra payment.
Here’s what the timeline and savings might look like if you pay down the debt with the smallest balance versus the debt with the highest APR:
In this case, the debt snowball and debt avalanche method would point you toward the same account: the credit card. With both the highest APR and the smallest balance, paying down your credit card can both motivate you and offer some high savings.
However, you may also want to consider other options for your HELOC and car loan to lower your rate — if interest rates are on the decline. During a low-interest period, consolidating your HELOC with a fixed-rate home equity loan can help you lock in a lower interest rate for the rest of your term. Refinancing your car loan at a lower rate can also help you save on the total cost.
Dig deeper: Home equity loan vs. HELOC: Which is best for borrowing against your equity?
How to get the most out of your debt payoff strategy
Follow these tips to keep your personal finances in shape while you’re paying down your debt.
Dig deeper: 5 popular budgeting strategies — and how to find the best fit for how you save
Alternatives for paying off debt
Here are a few other methods you may want to consider when you’re paying down debt. You can use one of these as an alternative or in combination with a debt repayment strategy.