According to a 2021 CNBC report, the average American has $90,460 in debt, including credit cards, personal loans, mortgages, and student loans. Getting out of debt can be a challenge, especially if you’re not regularly seeing significant changes as you’re paying them off. There are two main strategic ways consumers pay off their debt: the snowball method and the avalanche method.

Some haven’t heard of either, and those who have are unsure which one is better. Before choosing which will work best for you, you must understand what each method entails and what you can expect each to look like for you.

What is the debt snowball method, and how does it work?

The focus of the snowball method is to pay off the smallest debt as quickly as possible.

You continue paying the minimum payments on all other balances owed but allocate as much as possible towards the smallest debt. Then, once you pay off the smallest, you roll the money you were putting towards the now paid off debt into the next smallest debt.

For instance, let’s say you have the following debt:

• Credit card balance: $1,200 Minimum payment: $48
• Car loan: $14,000 Minimum payment: $300
• Student loan: $6,000 Minimum payment: $150

In this scenario, your smallest amount owed would be the credit card, followed by the student loan and then the car loan. You would continue paying the minimum payment on the student and car loans while putting extra money towards the credit card.       

Say you contribute an additional $100 to the account on top of the monthly payment. Once you pay off the credit card, you would roll over the $148 ($48 minimum payment and $100 of additional funds) to the student loan payment on top of the minimum of $150, meaning you would be contributing $298 to your student loan after eliminating the credit card debt.

The process would continue rolling over until all the debt gets settled.

To use the snowball method, you must first list all the debts you owe, including the monthly payment information, the total amount owed, and the due dates.

You can then sort your list from smallest to the largest monetary amount owed and determine how much extra you can afford to put toward the minimum payment each month. Remember, you must continue paying the minimum on every debt to protect your credit, so include those in your budget when determining how much additional you can add to the monthly payments.

Then, as you eliminate your first debt, roll over that contribution into the next smallest debt.

What is the debt avalanche method, and how does it work?

Rather than paying the smallest debt, the avalanche method prioritizes paying off the debt carrying the highest interest rate.

Despite this difference, it works similarly to the “snowball method” in that payments are rolled over to the next highest interest rate debt, and so on.

By addressing those with the highest interest rates first, this method aims to help consumers pay off debt while paying less in interest over time.

For example, using the same figures as before, if you carry the following:

• Credit card balance: $1,200 with 13% APR and a minimum payment of $48
• Car loan: $14,000 with 2.5% APR and a minimum payment of $300
• Student loan: $6,000 with 6% APR and a minimum payment of $150

The “avalanche method” would have you focus on the credit card balance, followed by the student loan, and then the car loan.

To utilize this method, you would list your debts, including the payment information, the total amount owed, minimum monthly payments, and the due dates.

You would arrange your list from the debt with the highest interest rate down to the lowest interest rate and then budget for how much extra funds you can contribute to the highest interest-bearing debt while continuing paying the minimum payment on the others.

As you pay off debt, you can then roll over those funds into the next highest interest-bearing debt and continue doing so until it all gets paid.

Pros and cons of the snowball method

Without a sense of progress, it is easy to become discouraged and stop prioritizing paying off your debt.

This hunger for self-gratification plays into one of the most significant advantages of the snowball method – fast results. Since you prioritize the smallest debt first, it typically doesn’t take long to start chipping away at it and pay it off entirely. Seeing results not long after starting helps you follow through with the plan.

The primary drawback of this method is that it can be more expensive in the long run since you prioritize the balances over the interest rates.

Advantages and disadvantages of the avalanche method

Since the debts with the highest interest rates get eliminated first, this method can save you hundreds or even thousands in interest payments.

Additionally, those with large debts may be able to repay them faster using the avalanche method.

The downside to this method is that you do not receive that same emotional benefit and motivation because it can take longer to see results and pay off your first debt. It requires more discipline to stick to, and it will not be as effective if you start to slack off on your additional contributions.

Which method is better?

Determining which method is best depends solely on if you prefer the better financial or psychological option.

If you are looking to save money and possibly time, paying off your debt, the avalanche method would be preferable.

In contrast, if you prefer fast progress and need encouragement to continue, a snowball method might work best.

What method you choose depends heavily on your personality and situation.

Ultimately, considering you stick to it, either option you choose will get you well on your way to becoming debt-free.