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

Debt Avalanche vs. Debt Snowball: An Overview

Paying off debt is no easy task, especially if you just pay the minimum amount due each month. To get free and clear, you often have to accelerate payments. There are two distinct strategies to settle outstanding balances in this way: the debt avalanche method and the debt snowball method.

Both debt avalanche and debt snowball apply to most kinds of consumer debt: personal, student, and auto loans; credit card balances; medical bills. (They do not work with, and shouldn't be tried with, mortgage repayments.) Each method requires that you list out your debts and make minimum payments on all but one of them. That one you pay extra money towards, with the aim of wiping it out first. Once it's erased, you target another balance; the extra money you apply towards it could be the minimum sum you had to pay on the erased debt.

The two strategies diverge over which debt you single out first. In the debt avalanche method, you pay extra money toward the debt with the highest interest rate. With the debt snowball method, you pay down the smallest debt first and work your way up, regardless of the interest rate.

While both are useful strategies to get debt out of your life, one method might be easier for you to stick with and make a bigger impact on your finances. Let's look at each approach in-depth, covering the pros and cons of the debt snowball and the debt avalanche. Then, we'll discuss some special considerations when tackling debt. By the end, you should have a good sense of determining which debt repayment method is best for you.

Key Takeaways

  • Debt avalanche and debt snowball are both types of accelerated debt repayment plans.
  • The debt avalanche method involves making minimum payments on all debt, then 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 first before moving on to bigger ones.
  • The debt avalanche method can result in paying less interest over time but requires discipline.
  • The debt snowball method can be more expensive but yields quicker results—valuable for maintaining motivation.

Debt Avalanche

The debt avalanche method involves making minimum payments on all your outstanding accounts, then using any of the remaining money earmarked for your debts to pay off the bill with the highest interest rate. Using the debt avalanche method will save you the most in interest payments.

Debt Avalanche Example

For example, if you have $3,000 extra to devote to debt repayment each month, then the debt avalanche method will make your money go the furthest. Imagine that you have the following debts:

• $10,000 credit card debt at 18.99% annual percentage rate (APR)

• $9,000 car loan at 3.00% interest rate

• $15,000 student loan at 4.50% interest rate

In this scenario, the avalanche method would have you pay off your credit card debt first, then allow you to pay off your remaining debt in 11 months, paying a total of $1,011.60 in interest. The snowball method would have you tackle the car loan first, becoming debt-free in 11 months, but you would have paid $1,514.97 in interest.

Just by switching the order of your debts, you can save hundreds of dollars in interest. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.

Pros and Cons of the Debt Avalanche Method

Just by switching the order of your debt payoffs, you can save hundreds of dollars in interest payments with the debt avalanche approach. For individuals with larger amounts of debt, the avalanche method can also reduce the time it takes to pay off the debt by a few months.

The debt avalanche method is the best strategy to save money and time, but it does have its downsides. Mainly, it requires discipline—to put all your extra allocated money into paying off a particular debt, and not just the minimum. The debt avalanche will not work as effectively if you lose motivation and skip a month or two of strategic repayments.

The debt avalanche approach also assumes a certain, constant amount of discretionary income that you can apply towards your debts. A bump-up in daily living expenses or an emergency could throw a crimp into the plan.

Pros
  • Minimizes the amount of interest you pay

  • Lessens the amount of time it takes to get out of debt

Cons
  • Takes discipline and commitment to pull off

  • Requires constant amount of discretionary income

Debt Snowball

The debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones—kind of a "tackle the easy jobs first" approach. You make a list of all the outstanding amounts you owe, in ascending order of size. You target the first one to pay off first, putting as much extra money into each payment as you can afford. The others you pay just the minimum on. When the first debt is settled, then you target the next-smallest one for the extra-payment treatment.

Debt Snowball Example

Let's see how the snowball effect works on our previous debt example. To recap, you have $3,000 extra to devote to debt repayment each month and you have the following:

• $10,000 credit card debt at 18.99% annual percentage rate (APR)

• $9,000 car loan at 3.00% interest rate

• $15,000 student loan at 4.50% interest rate

The snowball method would have you focus on the car loan first because you owe the smallest amount of money on it. You'd settle it in about three months, then tackle the other two. As with the debt avalanche method, you'd become debt-free in about 11 months. However, you would have paid $1,514.97 in interest—about $500 more overall.

45.4%

Percentage of U.S. families carrying some sort of credit card debt, according to a ValuePenguin survey.

Pros and Cons of the Debt Snowball Method

It's not easy to get excited about paying off what you owe, and it's even harder if you don’t seem to be making a dent in your debt; without a sense of progress, you can become prone to throw in the towel early on.

It's our hunger for instant gratification that makes the snowball method so effective, says personal finance author and talk-show host Dave Ramsey, an advocate of the technique. “The math seems to lean more toward paying the highest-interest debts first," he allows. "But what I have learned is that personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.”

The debt snowball method's big advantage is that it helps build motivation. Because you see fast results—eliminating some outstanding balances completely in only a few months—it encourages you to stick with the plan. That mountain of debt doesn't seem so unscalable after all. Plus, it's easy to implement—no need to compare interest rates or APRs; just look at each sum you owe.

The big drawback of the debt snowball is that it can be more expensive overall. Because you're prioritizing balances over APRs, you could end up paying more money in interest. Getting completely free and clear could take more time, too, depending on the nature of the debts, and how frequently the interest on them compounds.

Pros
  • Builds motivation by settling debts fast

  •  Easy to implement

Cons
  • Incurs more interest—more expensive overall

  • Can take longer to become completely debt-free

Special Considerations

Both the snowball method and the avalanche method are types of accelerated debt repayment plans—ways of speeding up the retirement of your debts, by paying more than the minimum due on them each month. Of course, both assume you can afford to commit extra funds to pay down what you owe on a regular basis. If your income is irregular or unstable—or if you think a layoff is imminent—you might want to stick with making minimum payments.

If you're applying one of these strategies to credit card balances, they should be credit cards you don't plan to use for new purchases. You can't pay off a balance, obviously, if you're continuously adding to it.

Finally, there may be special circumstances with certain debts that alter your repayment schedule. Say you signed up for a credit card with a 0% interest rate for 18 months and used it to invest in a state-of-the-art computer with all the bells and whistles. Whatever debt repayment method you're using, however, you'd definitely want to clear this balance before the special introductory rate period ends—regardless of how it compares to your other bills. Otherwise, you'll just have added a fresh pile to your interest-rate-bearing obligations.

Debt Snowball FAQs

What Does Debt Snowball Mean?

The debt snowball is a type of accelerated debt repayment plan. You list all of your debts from smallest to largest. You then devote extra money each month to paying off the smallest debt first; you make only minimum monthly payments on the others. When the first balance is settled, you move on to the next smallest. 

Does the Debt Snowball Really Work?

The debt snowball can be an effective method for settling just about any type of debt, with the exception of mortgage loans. A lot of its appeal is psychological. It has the debtor target small balances to pay off first; erasing these "easier" outstanding balances gives a motivational boost, encouraging the debtor to stay disciplined and keep on with their debt repayments—the way the quick loss of a few pounds encourages a dieter to stay with a weight-loss program.

Declares personal finance authority (and advocate of the strategy), Dave Ramsey, "The debt snowball works because it’s all about behavior modification, not math."

Which is Better, a Debt Snowball or Debt Avalanche?

Whether a debt snowball or a debt avalanche is better depends on whether we're speaking in financial or psychological terms.

In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest rates—targeting the most expensive ones first—it means you end up paying less in interest. That adds up to paying less money overall—provided you stick with the payment plan.

But, as any behavioral finance expert will tell you, human beings are often irrational when it comes to money. They find it much easier to stay motivated when they pay off smaller debts first, regardless of their interest rates. So, even though it might cost more, the debt snowball is better, psychologically speaking—debtors are more likely to stick with the program because they have a stronger sense of making progress.

Should I Pay Off Big Debt or Small Debt First?

Whether you should pay off big debt or small debt first depends on your psychological makeup. Studies have shown that paying off small debts often leaves people feeling more satisfied—small victories, so to speak—and more likely to keep on with a repayment program that eventually clears all their outstanding balances. Certainly, you get quicker results paying off the small debt, and it simplifies life, to have fewer bills coming in each month.

On the other hand, paying off big debt is more cost-efficient in the long run. The larger your outstanding balance, the more interest it's generating; in fact, a big percentage of your monthly minimum payment is probably going just towards the interest. So, by settling the big debt, you will save on interest, and you will free up funds for other bills and other purposes.

Is It Better to Put Money in Savings or Pay Off Debt?

Paying off debt has its advantages—especially if you're incurring a high-interest rate on it. With a lot of consumer debt (like credit cards), as much as half of the monthly minimum payments go towards interest. Those interest payments are just money thrown away. A lot of debt will also ding your credit score, making it hard to get financing at good rates if you want to buy a home or other big-ticket item. And finally, paying off debt will free up funds for other things—like savings or investments.

But there are pluses to saving too. You're putting your money to work for you, generating returns and earning interest. And, thanks to the miracle of compounding, your principal can multiply quite a lot over the years. Since time is a factor, the earlier you start, the better. Of course, much depends on what prevailing interest rates are, and how aggressively you want to invest your funds.

As a general rule, if you can earn more interest on your money by investing it than your debts are costing you, it makes sense to invest. But it doesn't have to be an either/or proposition—you can try to do a little of both, simultaneously.

The Bottom Line

If you are serious about tackling your debt, then pick which method is best for your own situation and personality. The best method is the one you can stick to. If you are a person that needs more incentive to pay off debt, then stick with the debt snowball method. If devoting money to interest payments—instead of denting principal—drives you nuts, then you might prefer the debt avalanche approach.

You can also use a combination of the two methods. Choose a debt that's relatively small (a la the snowball method) but that carries a high-interest rate (for the avalanche approach) to tackle first.

If both methods appear insufficient, you may want to consider debt relief instead.

Both debt repayment plans are useful and can help you regain financial freedom. Use specialized debt repayment calculators to discover when you will pay off your debt and how much interest you will pay.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. ValuePenguin. "Average Credit Card Debt in America: 2021." Accessed Mar. 23, 2021.