Debt Snowball vs Debt Avalanche: What’s the Difference?

Debt Snowball vs Debt Avalanche: What's the Difference?

(Daily360.com) – Americans average more than $90,000 in debt across all forms, including credit cards and mortgage payments. Those who owe such large amounts of money may feel daunted by the mountain they must climb to overcome it and break free. The snowball and avalanche methods offer similar yet different ways to flatten that towering collection of owed accounts, making a person’s journey to financial freedom significantly easier.

Snowball Method

Emotions often drive people into debt. The snowball method fights fire with fire, utilizing an individual’s feelings to help them escape this hole by drawing attention to little wins that help with motivation. It’s so popular that personal finance expert Dave Ramsey integrated it into his 7 Baby Steps to save money, pay off debt, and build wealth.

The snowball strategy starts with listing out all debts from smallest to largest. Count only total amounts owed rather than minimum monthly payments. If you have a couple of credit cards with balances of $500 and $750, but also have a personal loan of $7,000 and an auto loan of $15,000, you should begin your shortlist with $500 and end it with $15,000.

Next, focus on paying off that $500. Put any extra money into that account or add it to the monthly payment for that card. For example, if the minimum amount is $25 and you can afford to pay an extra $30, send $55 instead.

Once you pay off the $500, take a moment to appreciate the achievement. Then, start putting that same $55 toward your next available debt ($750 using the previous example). If you’re currently paying $30 per month on that one bill, the new payment would be $85 instead. Repeat this process and continue adding the previous total payments to the current account, creating a snowball effect until you are eventually debt-free.

Debt Avalanche

The debt avalanche method concentrates on paying off accounts with the highest interest rates first, regardless of the total owed balance. The faster you close these expensive debts off, the more money goes directly to the principal — and the less overall interest you end up shelling out over time.

Let’s say the $750 account mentioned earlier has an interest rate of 19%, while the $500 account is set at 15%. You would pay off the $750 first and the $500 second. After demolishing the highest-interest debt, the next step is to move on to the next highest until it, too, is gone. In a debt avalanche, you continue the same process until you’re debt-free.

While using the snowball method provides people with quick wins, debt avalanche helps people slowly and sustainably save money long term. Keep in mind that no matter which path you take, you should always make the minimum monthly payment on your accounts. Failing to do so can seriously harm your credit score.

Copyright 2022, Daily360.com