Debt Snowball Vs. Debt Avalanche: Which Is Better for Me?
There are many ways to become debt-free, but two of the most popular ones today are the debt snowball and debt avalanche methods. While these debt-payoff methods are similar in that they streamline the process by focusing on critical areas of your debt, they have some significant differences.
These differences result in each one working better for different personality types. Which debt payoff method is better for you? Keep reading to find out.
What is the Debt Avalanche?
The debt avalanche is a repayment method that emphasizes interest rates and balances. When using the debt avalanche method, you will focus all your extra cash on your debts with the highest interest rates and balances first while making minimum payments on all your other debts.
As you pay off each debt, you roll your extra cash down to the next-highest interest rate and/or balance. You continue this process until you’ve paid off all your debts.
Take these three credit cards, for example:
- $1,000 balance at 25% interest
- $500 balance at 27% interest
- $750 balance at 17% interest
In the debt avalanche method, you would throw every penny you’ve got at the card with the $500 balance at 27% interest. Once you slaughter the debt on that card, you roll all your extra money to the $1,000 card at 25% interest. After that card is at $0, you move to the $750 balance at 17% and crush that one. Boom! Debt-free.
Debt Avalanche Pros
- Save big on interest payments
- Rid yourself of biggest debts first
Debt Avalanche Cons
- Focusing on larger balances means longer gaps between payoffs
What is the Debt Snowball?
The debt snowball is like the debt avalanche in that is focuses your extra cash on one debt at a time. Instead of focusing on the highest interest rates, though, the debt snowball method focuses on paying off the lowest balances first while making only the minimum payments on high-balance cards. Once you pay off one card, you roll all your extra money upward to the next-lowest balance.
While you won’t save on interest using this method, you will get the quick satisfaction of paying off the lower-balance debts quickly.
Using the above example credit cards, you would still focus on the $500 card first, as it has the lowest balance. From there, though, you’d then move to the $750 balance then the $1,000 balance.
Debt Snowball Pros
- Quick victories can keep you moving
- Easier to track
Debt Snowball Cons
- Interest can pile up on higher-balance cards
Which Debt-Payoff Method Is Best for Me?
This is where you’ve got to look to yourself and honestly think about your personality. We understand you may think you can handle anything, and that’s great, but this requires an honest look.
Objectively, the debt avalanche is the best method, as it not only gets you out of debt in an organized fashion, but it also saves you on interest fees. That said, it requires a lot of willpower and determination, as there are no quick victories along the way to keep you going.
If you are someone who tends to hop on a new trend then jumps off quickly if there is no immediate reward, then the debt snowball is the method for you because the quick wins will help keep you motivated through the process.
Alternative Debt-Payoff Method
The debt avalanche and debt snowball methods may be the most popular these days, but they are far from the only methods. One of our favorite debt-repayment processes here at Smaller Dollars is the 0% rollover.
We’ve all gotten those offers in the mail, “Get 0% APR on balance transfers for 18 months!” These may seem like a scam, but they are generally legit and can help you get out of debt quickly and virtually interest-free.
If you qualify for one or more of these 0% balance transfer cards, you can roll your high-interest cards onto one or more 0% APR cards and pay off the balance interest-free. If you need more time, you can always get another 0% balance transfer card and roll the remaining balance onto it before the promotional period ends on the original card.
Sure, getting new credit cards results in new accounts on your credit report and may cost you a few points on your credit score, but getting debt-free quicker should offset those credit score dings.
There are a few caveats to the 0% balance transfer game, though. First, these cards will charge you a 3-4% fee to make the transfer. This may seem steep, but it’s actually much cheaper than any interest rate.
Second, watch out for deferred interest. This dick move means the credit card issuer will charge you the accrued interest on the remaining balance if you do not pay it off in time. This is super-rare in traditional credit cards – you generally only see it in store credit cards.