Debt Avalanche vs. Debt Snowball: Which is the Best Way to Pay Down Debt?
01/11/2024
By: Fidelity Bank
These two repayment methods can help you fast-track debt reduction.
If you have a lot of debt, paying it down can be overwhelming. But the good news is that it doesn’t have to be. Using the right repayment method can put you on the road to being debt-free and improving your financial well-being. We’ll look at two such accelerated payment strategies: debt avalanche and debt snowball.
Whichever repayment method you choose, you’ll want to start by writing down all your debts, including balances and interest rates. When you list debts, include everything you owe to someone else, including personal loans, student loans, auto loans, credit cards, and medical bills – but not your mortgage.
Debt Avalanche
Let’s look at the debt avalanche approach first. If you think of an avalanche, you think of snow rushing down a mountain very quickly. The name might sound a little scary when applied to debt, but it’s actually a good thing. The debt avalanche method is an accelerated repayment plan designed to help you get out of debt faster. With this method, you tackle your debts from the highest interest rate to the lowest interest rate, regardless of balance. You’ll make the minimum payment on all your accounts except the one with the highest interest rate. Put as much extra money as you can toward that account until it’s paid off. Then, move to the account with the next highest interest rate and take the same approach.
By paying down debt in this order, it will take longer to pay off your first debt, but you’ll save money on interest. For example, if you had the following debts, you would organize them and pay them off in this order using the debt avalanche method:
| Debt Balance | Interest Rate |
| Personal Loan – $15,000 | 20% |
| Credit Card – $10,000 | 15% |
| Car Loan – $20,000 | 10% |
| Student Loan – $25,000 | 5% |
| Medical Bill – $5,000 | 0% |
Key takeaways:
- Works well for budget-oriented people
- Helps you get out of debt faster
- Reduces the amount of interest you pay
- Takes a long time to pay off the first debt
Debt Snowball
Now, let’s look at the debt snowball approach. If you think of a snowball rolling down a mountain, it gets bigger and bigger as it rolls along. Using the debt snowball method, you pay off small debts first and then move to bigger ones, no matter what the interest rate is. Make the minimum payment on all the accounts except the one with the lowest balance. For that one, put as much extra money as you can toward paying it off. When that balance is paid off, move to the next account using the same strategy.
By paying down debt in this order, you’ll reduce the total number of debts, but you might not save as much in interest charges. If you used the debt snowball approach to tackle the following debts, you would organize and pay them off in this order:
| Debt Balance | Interest Rate |
| Medical Bill – $5,000 | 0% |
| Credit Card – $10,000 | 15% |
| Personal Loan – $15,000 | 20% |
| Car Loan – $20,000 | 10% |
| Student Loan – $25,000 | 5% |
Key takeaways:
- Helps you stay motivated as you see debts disappear
- You can pay off the first debt faster
- You’ll incur more interest
- Takes longer to become debt-free
Which Is the Best Plan for You?
How to Choose
If paying off smaller debts inspires and motivates you to stay on a repayment program, the debt snowball method might be a good fit. But keep in mind that paying off big debt, especially high-interest accounts, will likely save you more in the long run. For this reason, you might find the debt avalanche method is the more desirable option. Your credit score may also improve when you knock down debt. And it can free up cash you can use to save for a house, add to your emergency fund, or put away for retirement. Whether you choose the avalanche or snowball method, it’s important to stick with it to see the best results.
Reducing your debt is important to your financial health, but so is saving for the future. Don’t neglect to save for retirement or build an emergency fund while you’re carving away at what you owe. Always pay yourself first. For help with finances, saving, and debt reduction, reach out to your local Fidelity Bank to find a balanced plan that’s right for you.
Save Before You Spend
Experts recommend building a six-month emergency fund before committing to an accelerated debt payoff plan.
Whichever repayment method you choose, you’ll want to start by writing down all your debts, including balances and interest rates.