Debt Avalanche vs. Debt Snowball: What's the Difference? (2024)

FAQs

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

The avalanche method prioritizes eliminating high-interest debt while the snowball method prioritizes paying off the smallest debts first. Deciding which is your optimal method depends on your goals and what motivates you most.

The debt avalanche method involves making minimum payments on all debt and 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 before moving on to bigger ones.

As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced is accelerated. In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first.

Explanation: The answer choice that best describes the debt snowball method is c. pay off credit cards in order of balance amount, lowest balance first. The debt snowball method is a debt reduction strategy where you pay off debts in order of the smallest balance to the largest, regardless of interest rate.

Prioritizing debt by interest rate.

This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.

With the debt snowball method, you start with your smallest debts and work your way up to the largest ones. While it may not save you as much in interest as other repayment methods, the debt snowball method can keep you motivated to continue paring down your debt.

What is the debt snowball method? The debt snowball method was originally made popular by personal finance expert Dave Ramsey. This debt-repayment method (which excludes your mortgage) focuses on paying off your smallest debt balances first while making minimum payments on all other debts.

The debt snowball focuses on paying off debts from the smallest balance to the largest, regardless of the interest rate. While both methods can be effective, the debt avalanche method is generally considered to be more cost-effective since it prioritizes high-interest debts, resulting in less interest paid over time.

Debt Snowball Example

Using the debt snowball method, you would first tackle the debt on credit card 2, as it has the lowest balance. When that's paid off, you'd add the payment you were making on credit card 2 to the minimum payment for credit card 1, and so on until all your debts are paid off.

What is the snowball effect? ›

The snowball effect is a psychological term that explains how small actions can cause bigger and bigger actions, ultimately resulting in a big impact. Imagine a snowball that is rolling down a snow-covered hill. It starts small, but as it gathers more momentum, it picks up more snow, making it larger and larger.

Total balance (2023 Q4)

Mortgage debt is most Americans' largest debt, exceeding other types by a wide margin.

You'll save more on interest with the avalanche but using the snowball method can be emotionally satisfying as you clear away smaller, lingering debts first. It may help if you're trying to qualify for a mortgage as it reduces your monthly debt load.

Tackling your credit card debt first will also give you a better shot at improving your credit score. Revolving credit is highly influential in calculating your credit utilization rate, which is the second biggest factor (after payment history) that makes up your credit score.

What is the avalanche method? With the avalanche method, you pay off the balance with the highest APR first, then work your way through all your debt from highest to lowest APR. Some financial experts prefer this method because you end up paying less overall in interest.

Debt Snowball. Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments.

With the debt snowball method, you focus on putting your extra money toward your smallest debt first. The advantage of the debt avalanche method is that it saves more in interest in the long term, while the benefit of the debt snowball method is that it can be more motivating.

Cons of debt snowball:

However, this method does come with one major drawback. By prioritizing your debts in order of balance rather than focusing on the debt with the highest interest rate first, you end up paying more in interest over the long term.

The way the snowball debt strategy works is actually quite simple. Start by ranking your debts in order by the amount you owe, from smallest to largest. Next, put all the money you've budgeted for debt repayment toward the smallest of those debts and only pay the minimum payment on your others.