Home > Managing Debt > Debt Snowball vs. Debt Avalanche: Which Is Really Best?

Comments 0 Comments

In the world of personal finance, there are plenty of heated debates. Should you save for an emergency or pay off debt first? Is any debt “good” debt? Are balance transfers an acceptable way to pay off debt more quickly?

And then there’s the classic argument: debt snowball vs. debt avalanche.

Before we launch into the nitty-gritty of the “which is better” argument, let’s talk about what a debt snowball and a debt avalanche are.

Debt Snowball vs. Debt Avalanche

Both of these methods acknowledge a basic fact: you need a plan when it comes time to pay off debt. If you just start throwing a bit extra at debts at random, you’ll likely fail. Your best bet to becoming debt-free is to pay off your debts in a methodical, planned manner.

Snowballs and avalanches are both methods for paying off debt. The only difference between them is in the approach

The debt snowball was popularized largely by personal finance giant Dave Ramsey. The idea is that you start paying off your debts with the smallest balance first. Make all your monthly minimum payments. Then throw any extra funds at that smallest debt balance.

Once that debt is paid off, continue paying the previous minimum payment amount, but put it toward the next-to-smallest balance debt. Each new debt you pay off then essentially rolls into the next one. In this way, you “snowball” your minimum payments, putting more money toward your debts each month until they’re all paid off.

The debt avalanche is similar in that you roll your minimum payments together as you pay off debts. Where it differs is in the order in which you pay off your debts. Instead of starting with the smallest balance, the debt avalanche has you start with the highest-interest debt. Rank your debts by interest rate, and then pay them off in reverse order, following the same “rolling” method as the debt snowball.

Why the Difference? 

Having a plan to pay off your debts is, any way you slice it, a good thing. So why is there so much debate about which plan is best? Ultimately, it comes down to two things: math and psychology. With math, the debt avalanche always wins. But with psychology, the debt snowball usually does.

The Math Behind the Avalanche

If you know much about compounding interest, the mathematically correct way to pay off debts should be obvious to you. Knock out your highest interest rates first and you’ll save money over the long haul.

And this is true. In some instances, the difference could be hundreds or thousands of dollars in interest. You can use an online debt calculator to run the numbers. It’ll show you just how much you’ll save by using a debt avalanche rather than a debt snowball.

The bottom line is that even if it’s just a few bucks, you’ll always save money if you go with the debt avalanche method—that is, as long as you stick to your debt payoff plan. And that’s where the psychology behind the debt snowball comes in.

The Psychology Behind the Snowball

The question of snowball versus avalanche looms so large that social scientists have weighed in with actual studies. Their findings show that the snowball method is more likely to work. One study from Harvard showed that focusing on one debt at a time and knocking out the smallest debt is the best approach. Another study from the Kellogg School of Business concurred. Essentially, consumers who start debt payoff with the smallest debt are more likely to be successful in their debt payoff efforts.

Why is this? Well, psychologists theorize that it has to do with the quick wins you can get with the debt snowball method. If your smallest debt is a few hundred bucks, you can probably pay it off quickly. Then you begin to gain momentum as you move through your debts. By the time you’re tackling that monstrous $30,000 student loan, you have plenty of experience and drive to pay off your debts.

So Which Is Better?

To be honest, neither approach is considered better than the other.

Here’s the deal with this and other personal finance arguments: it’s personal. If you’re motivated by math—as many people are—you may find the debt avalanche is a better fit. If you’re like most consumers, though, the debt snowball is more likely to keep you on track.

One thing to keep in mind, though, is that the savings you get from the avalanche method will depend on a variety of factors. The longer it takes to pay off your debts, in general, and the wider the spread between your highest and lowest interest debts, the more you’ll save with the avalanche.

Of course, you can always take a hybrid approach. Say one of your middle-of-the-road debt balances has a super-high interest rate compared with your other accounts. You might consider paying it off first and then paying off your debts in order of balance and get the benefits of both methods. Or you might get some momentum by knocking out a few smaller debts first, and then start knocking out your higher interest rate accounts.

The goal here is to choose a method and stick with it. If you find yourself losing steam, find a smaller debt to get rid of. Just keep going until you’re finally debt-free.

For more tips on getting free of debt, including ways to change your spending habits, visit Credit.com.

Image: istock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.



Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team