Debt Repayment 101: The Snowball Method vs. The Avalanche Method

Debt is never an enjoyable topic to discuss—much less experience. But it’s a crushing reality that continues to worsen in the aftermath of this global pandemic. A recent estimate from The U.S. Federal Reserve shows that American household debt grew to reach a total of $16.51trillion in the third quarter of 2022. Most of us cannot even wrap our brains around a figure this astronomical, so what’s forcing debt into the stratosphere? Aside from high inflation rates, of course, here are the four main causes of debt in American households: 

• Mortgages
• Car payments 
• Student loans
• Credit cards

Let’s Talk About Credit Card Debt

According to the personal finance site ValuePenguin, nearly 50% of Americans carry an active, outstanding balance on at least one credit card. In fact, the average household’s total amount of credit card debt clocks in at $6,270. While it’s not exactly ideal to swipe a square of plastic and watch the balance soar incrementally higher, that vicious cycle can seem unavoidable at times. With the costs of food, housing, fuel, and other basic essentials on a sharp incline, debt might feel like an endless hamster wheel you can never jump off. 

It’s a challenge to stay on top of those living expenses and climb out of debt at the same time. However, it is possible with a clear, intentional plan of attack. The question is, which debt repayment method is the right choice for you? There are two common strategies to be aware of—the Snowball and Avalanche Methods. Either option can be successful if you stick with the program, so remember: consistency is the name of this game. Below we’ll dive into the specifics of each debt repayment method to help you formulate an effective strategy.  

How the Debt Snowball Method Works

Picture a snowball as it careens down a hill—the more speed it continually gains, the heftier it progressively becomes. That’s how the Snowball Method of debt repayment works too. The point here is to increase momentum (and boost your confidence) by first paying off the entire balance of your smallest debts, then using this disposable cashflow you just freed up to tackle larger debts. The satisfaction you’ll experience upfront from these noticeable achievements will fuel your motivation to continue on until no more debt remains. Here are a few simple and actionable tips for how to use the Snowball Method: 

• Create a list of each debt you owe, the remaining balance, and the minimum monthly payment. Then reorder the line items from smallest balance to largest.   
• Start paying off the minimum amount owed on your smallest debt each month (do not pay less, as this will accrue late fees and impact your credit score). Once the minimum is paid, use any extra cash on hand to lower that balance even quicker.  
• As soon as your smallest debt is taken care of, advance to the next line item on your list. Combine this minimum payment with the amount you’ve been putting toward debt each month already. That “snowball effect” will accelerate the pace at which you conquer debt number two. Keep this momentum as you move further down the list. 

How the Debt the Avalanche Method Works

While the Snowball Method focuses on building momentum from small debts—regardless of interest rate—the Avalanche Method approaches debt repayment from the reverse angle. With this tactic, the first priority is to crash down your highest interest debts (like an avalanche). It can be a wise strategy to minimize the percentage of interest that accrues on your existing balance each year. However, the Avalanche Method won’t offer quick results and short-term victories to galvanize you. This process is gradual, so it takes patience and endurance to pull off. Follow these action steps when using the Avalanche Method: 

• Create a list of each debt you owe, the remaining balance, and the minimum monthly payment. Then reorder the line items from highest interest rate to lowest.   
• Make a budget of all your expenses to visualize both the income and outflow of cash per month. Determine which areas of spending are vital and which areas you can cut back on. Once you eliminate those non-essential purchases, allocate this extra money toward the highest interest debt on your list (above monthly minimum payments).  
• As soon as your highest interest debt is taken care of, advance to the next line item on your list. Check in with the budget each month to see where you can curb spending habits to earmark even more cash for debt repayment. Just as an avalanche accelerates with strength and size, you will achieve incremental progress over time.

Avalanche vs Snowball Method: Which Debt Repayment Option Is Better?

As with many choices in life, this will ultimately come down to preference. Are you someone who needs quick gratification on the frontend to sustain your motivation for the long-haul? Opt for the Snowball Method. Are you willing to be patient if it means reducing those annual interest rates? The Avalanche Method has your name on it. But no matter which of these two options you land on, tackle it with gusto—financial freedom is within reach.