You’re in over your head in debt and you don’t see a way out. Don’t worry, you aren’t alone. According to a CreditCards.com poll, 51% of Americans already in debt, added to it during the pandemic. Even if you didn’t add to your credit card balances during the pandemic, getting out of debt is important as paying interest is an opportunity cost for many other investments.
But, rather than focusing on the downside of carrying debt, see what you can do about getting out of it. While there are many ways to pay off your credit card balances, the two most common methods are the debt snowball and debt avalanche method.
We compare the two methods below to help you see which one may suit you the best.
What’s the Debt Snowball Method?
The debt snowball method is for consumers who like ‘quick wins.’ If you thrive on motivation and need to see progress immediately to keep going, this is the method for you. The debt snowball method works your debts from smallest balance to largest, paying off your smaller debts first so you can have the ‘victory’ feeling and keep going.
How Does it Work?
The debt snowball method is simple. Pull all your debts and arrange them by balance, smallest to largest, ignoring the APR for the time being. Also, note each debt’s minimum required payment because you’ll need that information too.
Budget for the minimum payment due on each debt every month. For example, if you have three credit cards with a $25, $35, and $50 minimum payment, budget $110 each month to pay your debts.
Next, see how much ‘extra’ money you have to put toward your debt. If you have a set amount you can budget, that would be best. Let’s say you have an extra $150 a month you can pay toward your debt.
To start, you’ll add the $150 to the minimum payment of the debt with the lowest balance. Let’s say from our example, the lowest debt has a $25 minimum payment. You’d pay $175 to that debt, and $35 and $50 to the other two respectively.
Keep doing this until you pay off the first debt. Once you do, take the $175 that you paid to the first debt and add it to the minimum payment of the next debt. In our example, you’d add $175 to $35, paying $210 to your next debt.
Keep building your ‘snowball’ until you are out of debt.
The Pros and Cons of the Debt Snowball Method
Pros:
- You’ll have ‘quick wins’ which can be motivating
- It helps you focus your extra money so you see progress
- It may help change your spending behavior
Cons:
- You’ll pay more interest charges since it focuses on balances, not APRs
- If you don’t hide or close your credit cards once they’re paid off, you could end up back in debt
What’s the Debt Avalanche Method?
The debt avalanche method focuses on APRs rather than balances. It doesn’t provide the same ‘quick wins’ but it helps you pay off the highest interest credit card debt first, which should save you more money in the long run.
How Does it Work?
The debt avalanche method works similar to the debt snowball method, but instead of listing your debts by balance, you’ll list them by APR, ignoring the balance. Just like with the snowball method, make note of the minimum required payment for each debt.
Budget for the minimum payment on each debt and see how much extra money you have to put toward your debt. For example, if you have three cards with a 15%, 19%, and 25% rate, you’d focus on the debt with the 25% rate first.
Pay the minimum required balance on the 15% and 19% card and pay the minimum balance plus any extra money toward the 25% credit card. You won’t see fast progress since you’re mostly paying interest at first, but eventually, you’ll see your principal balance fall as the interest charges decrease.
Once you pay off the first debt, take the amount you paid to the 25% credit card and add it to the minimum payment of the card with the next largest APR. Keep going until you’re completely out of debt.
The Pros and Cons of the Debt Avalanche Method
Pros:
- You’ll save money on interest by paying the debt with the largest APR first
- You may get out of debt faster because you’ll save so much money on interest
- It’s the smart way to pay off debt by avoiding excessive interest charges
Cons:
- It takes time to see progress which can be frustrating and not motivating.
- If you don’t hide or cancel your credit cards, it’s easy to get back into debt fast
Bottom Line
Which debt payoff method is right for you?
It depends on your personality. If you need to see instant progress, stick with the debt snowball method. While it costs you more in interest over the life of the debt, if it helps you stick to the program, it’s worth it.
If you have more patience and paying high APRs causes you to lose sleep at night, then opt for the debt avalanche method and crush your debt by paying off the highest interest rates first.
You can’t go wrong with either method, as they both help you budget and focus your efforts on getting out of debt rather than haphazardly paying your debts and hoping your efforts pay off. The key is consistency. If it’s tough to find extra money, get creative. Start a side hustle, cut some expenses, or rearrange some of your debts by refinancing so you have extra money to focus on the debts that hurt your finances the most – your credit card debt.