Snowball or avalanche: which debt to pay first

The two methods

The CFPB describes two basic strategies for reducing debt. The highest interest rate method (the avalanche) focuses on the debts with the highest rate, such as credit cards, because they cost you the most. You pay them off as quickly as possible, even though it may not feel like you are making progress.

The snowball method focuses on your smallest debt. You keep making the minimum payments on all your debts and put every extra dollar toward the smallest one. When it is paid in full, you move the freed-up money to the next smallest, so the payment grows like a snowball as the debts disappear.

A worked example

Take three debts: $3,000 on a card at 24% with a $90 minimum, $8,000 on another card at 18% with a $200 minimum, and a $5,000 loan at 9% with a $150 minimum. You can pay $300 a month above the minimums.

Paying only the minimums takes 52 months and costs $6,680.85 in interest. With the $300 extra, the avalanche clears the 24% card first, then the 18% card, then the loan: 26 months in all and $2,756.10 of interest. The snowball clears the 24% card, then the smaller $5,000 loan, then the 18% card: also 26 months, but $3,022.51 of interest. That is $266.41 more.

When the difference is larger

The gap grows when a small debt has a lower rate and a large debt has a high one. With $1,000 at 15% (minimum $25) and $10,000 at 22% (minimum $250) and $200 extra, both methods take 31 months. The avalanche costs $3,258.77 in interest and the snowball $3,421.83, which is $163.06 more.

The snowball clears the small debt in the fifth month, a quick win, while the avalanche works on the big one and clears it in the 29th month. In both examples the difference is a few hundred dollars: far smaller than the gain from paying extra at all.

How to choose

• If your main goal is to pay as little interest as you can, the avalanche is the better choice.
• If you need quick wins to stay motivated, the snowball may keep you going, at a small extra cost. The CFPB makes the same point.
• If the debts have similar rates, the snowball costs almost nothing extra, so the quick wins are close to free.
• Whichever you choose, pay at least the minimum on every debt, so you do not collect fees or a higher rate.

What matters more than the method

The size of the extra payment matters far more than the order. In the first example, $300 a month more cuts the time from 52 to 26 months and the interest from $6,680.85 to $2,756.10. Finding the extra money, a lower rate or a free hour with a nonprofit credit counselor will change your result more than the choice between the two methods.

Be careful with shortcuts. A balance transfer usually has a fee and a promotional rate that ends; a consolidation loan can lower the payment only because it lasts longer, so you pay more in total. The CFPB explains both.