The debt snowball and debt avalanche methods are two popular debt payoff tactics, but they’re not the only ones. Here, we’ll review a few common strategies to help you explore which may be best for you. To find your best debt reduction strategy, consider your preference for saving money on interest, the amount you can pay each month, and your need for motivation.
Debt Snowball
With the snowball method, you pay your debts off from the smallest to the largest amount due, regardless of interest rate or other account factors. This technique allows you to pay off small debts quickly, making more progress toward catching up with accounts. Once you pay off one account, roll over that monthly payment to the next account while continuing minimum payments on your other debts. Repeat the process until all your accounts are paid off. With the debt snowball method, you’d arrange your debts priorities from lowest to highest, like this:
Debt Avalanche
With the debt avalanche method, you start by paying off your debt with the highest interest rate, regardless of the total balance or monthly payment. Similar to the debt snowball method, you focus on paying off one debt at a time. First, you make sure you pay the minimum payments on all your accounts. Then, you’d contribute any extra money as one lump sum to one account until you pay off the highest-interest card. After that, you’d focus on the debt with the second-highest interest rate. Under the debt avalanche method, here’s how you’d pay off the same balances listed before:
Debt Consolidation
Consolidating your debts allows you to combine multiple debts into a single balance so you can pay your total debts off with one payment. If you primarily have credit card debt—or balances that can be paid off with a credit card—you can transfer all the balances to one balance transfer credit card, then focus on paying down your larger credit card balance. Combining debts with a debt consolidation loan is another option for merging multiple credit card balances. This type of personal loan is used to pay off debt balances. You can also pay a debt consolidation company to oversee the process for you, but you can save money by consolidating debts yourself. Debt consolidation may allow you to save money on interest if you consolidate with a low-interest-rate loan. You may also be able to pay your debt off faster, depending on your monthly payment.
Debt Management Plan
If you’re having a hard time paying your bills, repaying your debts under a debt management plan (DMP) can give you a break on interest and the monthly payment amount. A DMP is a payment agreement with your credit card issuers, typically three to five years, and is arranged by a consumer credit counseling agency. Once your plan is approved, you’ll make one payment each month to the credit counseling agency, which will divide your payments and send them to your credit card issuers.
Which Method Is Right for You?
The method you choose for paying back your debts is a critical decision, Jill Gianola, owner of Gianola Financial Planning, LLC, told The Balance in an email. She considers it a key factor in her clients’ success in repaying their debts.
Save on Interest
The debt avalanche method saves money in the long run because you’re getting rid of your more expensive debts first. On the other hand, large high-interest rate debts can take a while to pay off, so you may not get the emotional satisfaction of clearing a whole credit card balance as quickly as you would with other methods. The debt avalanche method may be good for you if you’re disciplined, keep good records, and have a reliable monthly income, said Gianola, who also co-authored Single Women and Money: How To Live Well on Your Income.
Staying Motivated
For many people, the debt snowball method feels more rewarding, especially in the beginning, because you can quickly cross off smaller debts as you pay them off. Despite being more expensive in terms of interest costs, Gianola recommends the debt snowball method for people who need to see progress to stick with their plan. “Even though they may end up paying more interest on their loans, these clients are more likely to stay on track with the snowball method,” said Gianola.
Large Debt Balances
Debt consolidation may be right for you if you’re overwhelmed by the hassle of making multiple payments for your debts each month. Also, if your credit score is high enough, you can secure a loan or card with a lower interest rate than you’re paying on existing debts. But paid debt consolidation services should be approached with caution. The industry has been a target for scammers, Jim Pendergast told The Balance in an email. Pendergast is senior vice president of altLINE, a division of The Southern Bank Company. If you decide to use one of these services, look for legitimate businesses with references.
Affordable Payments
Consider a debt management plan through a credit counseling agency if you’re having trouble making your minimum monthly payments. Credit counselors can work with your creditors to lower your payments so that they’re more affordable. Gianola cautions against using other types of debt relief companies, which may charge fees that can get you deeper into debt. Below, you’ll find a summary of the four repayment strategies we’ve discussed. Now that you have a better understanding of these repayment techniques, consider which one will best fit your circumstances and your personality. Whether you prioritize saving or you want a motivational boost, choosing a plan that will work for you can lead to success with your personal financial goals.
