Debt Snowball vs. Debt Avalanche: Which is Right for You?

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Debt appears to be a daydream with all the ability to spend freely and naturally becomes a nightmare. Most people get caught into a debt trap at a young age due to credit cards and misunderstanding the responsibility that comes with their use. For people with discipline, debts aren’t much of a problem.

Typically, avalanche and snowball methods are used to eliminate any debt. However, the approaches are somewhat different, depending on your specific needs.

Let’s learn more about debt and how these two techniques can help you overcome debt.

Why Debt Accumulates?

Most people become trigger-happy with credit cards at a young age. They can easily buy whatever they want without realizing the long-term consequences. Credit cards are not free money, but they feel that way when people spend them. Eventually, it overcomes people financially, and they need to cut down on their other needs to stay current on debt retirement.

How to Get Rid of Debt?

The first step to getting rid of debt is to stop using it altogether, especially credit cards. It’s a tough ask but a necessary one. Also, try to consolidate debt into one account with a low-interest rate. Getting such a deal is only sometimes possible, but you should check with your lenders. The next natural step is to pay off the debt. Remember, always pay more than the minimum required payment. The minimum payments are primarily based on the interest plus a few dollars or principal.

Once you’ve achieved the above milestones, there are two commonly used strategies to adopt. These strategies help retire debt quicker and, in some cases, can lead to savings in interest payments.

The Strategies

Plenty of strategies are available to get rid of the credit card debt. However, two are more commonly used and have been tried and tested over time. Let’s learn more about the debt avalanche and debt snowball strategies.

The Debt Avalanche Strategy

The strategy works by getting rid of the high-interest-rate debt first. You may have several credit cards at a time and want to get rid of them quickly. The debt avalanche strategy suggests eliminating the one with the highest interest rate.

Let’s say you have four credit cards with minimum payments of $300, $350, $550, and $600 monthly. They have respective interest rates of 17%, 19%, 20%, and 19.25%. You have $2,000, with the total payment due $1,800.

According to this strategy, you should pay an additional $200 to the 20% credit card. This will allow you to pay off more principal on the highest credit debt and pay lesser interest in the coming months. The key is to remain consistent and continue paying off the excess consistently. Once you’re done with one debt, you move on to the next one with the highest interest.

Pros and Cons

There are several pros of this method.

• You save a considerable amount on interest payments over a while.
• This is the fastest way to pay off the outstanding debt.
• The payment approach is structured, with no guesswork, just a straightforward methodology.

There are a couple of downsides to this approach as well.

• You must be able to pay more than your current debt for this strategy to be successful.
• Paying debts off can take considerably longer if you have several debts.

The Debt Snowball Strategy

The method is pretty simple. It suggests that you pay off the smallest debt first and then move on to the next one. This allows you to reduce the number of accounts you have at a time and allow you to pay more every time you retire a debt. It is generally the preferred option when the debt is considerably high.

In the above scenario, you would first pay off the $300 monthly debt, diverting the additional $200 to its payments.

Pros and Cons

Here are the pros of the snowball method.

• The methods offer lots of motivation to repay the debt since you quickly get rid of the total debt.
• It’s easy to implement the method every month and slowly eliminate your debt.

There are some cons of this method as well.

• If you have a difference in interest rates, you can pay higher rates while you retire the smaller amounts.
• The method can be time-consuming and may require a while to get rid of the loan.

Which One is the Best?

 

Both methods have their merits and work well in different situations. If your credit card with the highest balance is also the one with the highest debt, the avalanche debt strategy is a no-brainer. However, the snowball method is better if your debt interest rates are similar.

Eventually, both methods must be followed consistently to ensure the debt is retired. With good financial discipline, you can become debt free quickly.

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