Debt Snowball vs. Debt Avalanche: Which Pays Off Debt Faster?
An avalanche approach generally saves more interest when you put the same amount toward the same debts each month. The debt snowball can help reach the goal of having one balance at zero quicker. Those are different kinds of progress.
Let’s say you had three debts totaling $8,000, and your monthly payment budget is $500. In this example, using a snowball plan means you would clear the first balance after just three months. An avalanche plan means you would need to clear 15 months to get to your first zero balance, but that plan would also mean you would clear all three debts one month earlier and save $280.70 in interest. Here is how to test the trade-off using your accounts.
Both methods use extra payments. Only the order changes.
No matter which method you choose, you always want to pay the required minimum by its due date. Then you would make an extra payment each month toward the debt in your budget.
- Debt snowball: You would pay off the debts in order from smallest to largest. The debt snowball can give you a quicker first victory to cross a debt off your list.
- An avalanche approach orders debt repayment from the highest to the lowest interest rates. The repayment of credit card balances should be determined by the applicable APR (Annual Percentage Rate).
Once a balance is cleared, you could continue making that payment to the next balance, rather than reducing your total monthly payment.
When we say “payoff” here, we mean paying the final amount due on the credit card, NOT closing a credit card account. You also do not need to get a new loan in order to do either of these.
Follow the same $500 through both plans
Hypothetical Example: The three accounts are current, and there are no new changes (no charges, fees, rate changes, early payment penalties, etc.).
| Account | Balance | APR | Monthly minimum used |
|---|---|---|---|
| Card A | $600 | 8% | $30 |
| Card B | $2,400 | 15% | $75 |
| Card C | $5,000 | 24% | $125 |
The total monthly minimums are $230, leaving $270 extra each month. For this example, each account keeps the listed monthly minimum until its balance is reduced to the point where it is less than the minimum. The month’s payment includes interest added using the following formula: opening balance x APR/12. Each interest amount is rounded to the nearest cent. Any payment that is not used for that target is added to the next target for that month.
This example is a simplified monthly model to illustrate the comparison. Actual cards may calculate interest differently and change minimums differently. The payment date can change the amount of interest charged.
Snowball: Card A, then Card B, then Card C
In the first month, Card A gets $300. This includes its $30 minimum and the $270 extra. Card B receives $75, and Card C receives $125. After payment, Card A’s balance is $304.
Card A has $6.03 after the next $300 payment. In month three, interest brings the total payoff to $6.07. The rest of the month’s budget goes to Cards B and C. Card B gets $368.93, and Card C gets $125.
Card B receives up to $375 a month. Any leftover money in its payoff month goes to Card C. Once Card B is paid off, the full $500 goes to Card C. The plan ends in month 20.
Avalanche: Card C, then Card B, then Card A
Card C starts with $395 a month: it’s $125 minimum plus the extra $270. Card A receives $30, and Card B receives $75. Card C’s first $100 interest charge leaves a balance of $4,705 after the payment.
That $100 charge is more than Card A’s $4 charge, but the reason to focus on Card C is its higher rate. An extra $100 on Card C avoids $2 of interest next month. The same extra $100 payment on Card A would avoid $0.67 of interest next month.
In month 15, Card C reaches zero. From then on, its payment moves to Card B. All balances are zero in month 19.
An early win has a price you can measure
Clear just one small debt as a third option is to clear Card A, then switch to the avalanche and pay off Card C and Card B. This method keeps the early payoff but does not strictly adhere to a snowball plan.
| Strategy | First balance reaches zero | All balances reach zero | Total interest |
|---|---|---|---|
| Snowball | Month 3 | Month 20 | $1,580.96 |
| Avalanche | Month 15 | Month 19 | $1,300.26 |
| One small debt, then avalanche | Month 3 | Month 19 | $1,390.85 |
It costs $90.59 more in interest with the early win option than with the full avalanche. Taking the snowball option costs an additional $280.70. The last payments are less than $500: $80.96 for the snowball, $300.26 for the avalanche, and $390.85 for the hybrid. The budget stays the same until the last payment is made.
These differences are inherent in this list of debts. In the example above, if the smallest debt has the highest interest rate, both methods can target the same debt first. With equal terms, neither method has a rate advantage. It is possible to have two plans end in the same month, but with different costs.
In the past, have you found crossing an account off your list helped with keeping up with your payments? An early win may be a good motivation boost. However, with a snowball plan, there is no guarantee you’ll stick to the plan.
Results can also be shown without modifying targets. Total balance falling each month can be tracked instead of counting accounts reaching zero. In this example, 14 months of progress is still shown, even with the 15-month wait for the payoff.
Check for terms that change the order
Current debts with decreasing interest work best with a simple rate ranking. A few details can change the outcome.
A promotion has a deadline
A true 0% APR promotion and “no interest if paid in full” are different. With the latter, if you don’t pay the full balance before the promotional period ends, interest will retroactively be charged from the purchase date. The CFPB explains the deferred interest payment rules. This includes detailing the fact that minimum payments may not clear the balance in time.
Give that deadline its own payoff plan before treating the balance as the lowest rate debt. For a true 0% APR offer, include the post-promotion rate in the analysis. A rate increase can change the prioritization of debts.
One account contains more than one rate
A single credit card can have different rates for purchases, cash advances, and balance transfers. In a financial projection, those balances should be listed separately. You can’t assume you can direct a payment to a specific balance.
According to the CFPB’s credit card payment-allocation rules, the amount paid over the minimum is generally applied to the highest interest-rate balance first. The card issuer has discretion to determine where the minimum is applied. Deferred-interest balances have special rules near the end of the deferred-interest period.
An installment loan’s APR includes past fees
The APR for an installment loan is a representation of the cost of credit over a period of time and may reflect an upfront cost that the borrower has already paid. This cost, however, may not represent a cost the borrower can avoid. When analyzing the opportunity to prepay a personal loan, evaluate the interest and charges that remain. Determine how an extra payment impacts the loan balance and whether a prepayment charge applies. For a precomputed-interest loan, a payoff calculation is warranted.
Neither payment order replaces a plan for overdue essential bills. If there is a risk of losing housing, utilities, or a means of transportation, that should take priority over prepaying a card. If required payments do not fit at all, there are more options available when payments are unaffordable.
Run the comparison with your own accounts
Use balances from the same date. Choose a monthly budget you can keep paying after essential expenses. List each required minimum, applicable rate, due date, and promotion deadline. Then make 2 copies of the same debt list.
- Change only the target order. Sort the first copy in order of smallest balance and the second in order of highest interest. In the case of debts with equal terms, the debt with the smaller balance will prevail.
- Maintain the full payment budget in both plans. If a minimum falls, the difference becomes an extra payment. When a debt is paid in full, move the money to the next target. Reduce the budget only for the last payment.
- Record three results. Compare the first payoff, final payoff, and total interest. Add a one-small-debt hybrid if an early payoff is important to you.
Before using a calculator’s answer, check the assumptions. An example of this is lowering total payments as minimums drop is modeling a different plan. So is a comparison that gives one method more money each month.
For example’s sake, if you are also looking to replace the debts by taking out a new loan, examine debt consolidation costs, and see if there’s a budget savings there, too, because a smaller payment doesn’t always mean there’s savings.
You can choose your next target from the results, and then verify that the payment posted as intended. For rate and budget changes, update both your projections. The interesting question to ask is: how much interest would an earlier small payoff cost, and is that worth it to you?