Debt builds so quickly. Inflation, job loss, medical bills, trauma—so many things can cause debt to increase, including the interest charged on debt each month. How do you get out from under that mountain?
It helps to have a sound strategy in place. Even small steps can help reduce the mountain of debt.
Two popular debt relief strategies refer to the ways snow falls off a mountain. Those are helpful images because debt feels like a mountain. One is the snowball debt strategy, and the other is the avalanche debt strategy.
Let’s look closely at both strategies and see which strategy works best in different situations.
The Snowball Debt Strategy
In the snowball debt strategy, you start by paying off your smallest debt balance first. That means you pay more than the monthly minimum on that one balance. You continue to pay the minimums on your other balances.
When the smallest debt is paid off, you target the next smallest debt. You continue to pay the minimum on the next smallest debt. Additionally, you pay the amount you were paying on the balance that is now paid off.
Let’s say you have three debts. Debt A has the lowest balance and Debt C has the highest balance. Your monthly minimums are as follows:
Debt A is $25.
Debt B is $30.
Debt C is $40.
Let’s say you decide to target Debt A first because it has the lowest balance. You start by paying extra—more than the minimum—each month on Debt A:
$100 per month on Debt A.
$30 per month on Debt B.
$40 per month on Debt C.
After Debt A is paid off completely, you target Debt B. Your payments will look like this:
$130 per month on Debt B.
$40 per month on Debt C.
When Debt B is paid off, this is what you’ll pay:
$170 per month on Debt C.
See how the momentum grows?
If you think about how a snowball rolls down a mountain, increasingly gathering bulk and momentum, you’ll see how this debt strategy works.
The snowball strategy builds visible momentum and is a great motivator. You’ll get to see small balances disappear quickly. And you’ll get to watch the total number of debt balances and interest payments fall.
You’ll appreciate how the momentum grows. As you pay off each balance, you’ll be putting larger amounts toward each next balance. You’ll watch those disappear much faster than when you paid just the minimum.
The beautiful thing about those larger payments is they are doable. You were already paying that amount each month anyway. Except now, you’ll be putting more of that money toward paying down principal instead of interest.
The Avalanche Strategy
In the avalanche debt strategy, you start by paying off the balance with the highest interest rate first—even if that’s the largest balance. That means you pay above the monthly minimum on that one balance. You continue to pay the minimums on your other balances.
Even if your highest interest balance is high to start, you’ll be watching the amount of interest drop as you pay down the balance. Each month, you’ll add that extra interest savings to your monthly payment. That’s how you’ll build momentum.
When that first balance is paid off, you’ll target the next highest interest balance. Whatever monthly amount you were paying on that first balance, now you’ll pay that plus the minimum on that next balance.
Let’s say your highest interest balance is $2,000 with $45 per month interest. Your next highest interest balance is $1,700 with $25 interest.
You target the $2,000 balance to pay off first, even though it’s higher than the other balance. As you start to pay off that balance, you’ll watch the interest amount drop—and you’ll add the difference to your payments.
Let’s say you’re paying $120 per month toward that $2,000 debt balance with the $45 interest charge. As the debt balance decreases, let’s say that interest amount drops to $40. You’ll add that extra $5 savings to what you pay monthly: $120 plus $5 equals $125 that you’ll pay monthly now.
When the interest drops even further to $30, you’ll be adding an extra $15 to what you pay monthly. So now, instead of paying $120 per month, you’ll be paying $120 plus $15 equals $135 per month.
See how the momentum grows?
Think about how an avalanche accelerates coming down a mountain. It starts at a high point that’s harder to access. But as it cascades down the mountain, it takes more snow with it.
If your high interest balances are also your largest debt balances, it may take longer to pay off each one. But you’ll be reducing your interest payment steadily and able to take out a bigger chunk of the balance each month — just like an avalanche coming down a mountainside.
Pros and Cons of Each Debt Relief Strategy
Before choosing a debt relief strategy, it helps to look closely at the benefits and challenges of the snowball and avalanche strategies.
Snowball Debt Strategy
In the snowball debt strategy, you’ll be motivated by knocking out smaller balances quickly. You’ll see a faster reduction in the number of balances you hold in debt.
The drawback to the snowball strategy is you might be paying out more in interest each month. If your smallest balances have the lowest interest, you’ll continue to pay higher interest on your other balances. However, in the event your lowest balances have the highest interest, then the interest amount won’t matter as much.
Avalanche Debt Strategy
In the avalanche debt strategy, you’ll be motivated by the money saved on lowering interest payments each month. That means less interest money you’re throwing away on debt.
The drawback to the avalanche strategy is that it may take longer to close out balances, especially if your higher interest balances are also the largest balances. However, if your higher interest balances have smaller totals, you can see faster progress.
Snowball or Avalanche: How Do You Decide?
To choose a strategy that makes sense for you, consider your personality, as well as your interest rates, payoff requirements, and repayment status.
Are you more motivated by visible progress? The snowball strategy might help you close out more balances quickly.
Are you more motivated by saving money on interest payments? The avalanche strategy might help you watch the total of interest payments drop more quickly.
A good starting place is to make a list of each debt balance amount and the amount of interest you’re paying monthly on each debt balance. That way, you’ll see if you can close out a smaller balance quickly, or if you can ditch a bigger interest payment quickly.
If you start out with the snowball strategy and close out a small balance, you can always switch to the avalanche strategy next, if that makes more sense. If you start out with the avalanche strategy and close out a high interest balance, you can always switch to the snowball strategy next, if that makes more sense.
The main thing is to keep the momentum going by rolling your monthly payment from the closed balance to the next balance you will tackle.
Consider payoff requirements in your decision. If you have a prepayment penalty, you have to weigh that amount against the benefits of early payoff. Which path makes the most financial sense?
Take repayment status into account as well. If you have a balance in collections or at legal risk, that needs to be your priority regardless of balance or interest amount.
Keep in mind that a simple phone call to each lender might help you renegotiate payment amounts in the event you are struggling financially due to job loss, health crisis, or similar situation. Many consumers don’t realize that monthly payments can be lowered with a phone call. Lenders want communication and consistency.
Whichever strategy you choose, keep at it. When you pay off the first balance, make a commitment to roll that monthly payment amount toward the next balance—added to the minimum you were already paying on that next balance.
Resist the temptation to spend that money. You were already putting it toward your monthly debt payment, so continue to do so. You will be glad you did, especially when you are able to say you’re debt free.
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Disclaimer: This article is for informational purposes only and is not financial advice. I am a content writer, not a financial professional. Readers should consult a qualified advisor before making financial decisions.
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Janet Eriksson 