The typical American household carries $15,762 of credit card debt. With the average credit card interest rate hovering around 13.35% today, that means households could easily spend more than $2,000 each year on credit card interest alone.
As more and more interest accrues, paying off what might have once been a relatively small amount of debt can easily start to feel like an impossible feat.
That’s why getting out of debt — especially when you have several different types of debt to deal with — requires a strategy.
Two of the most popular debt payoff strategies out there are the “debt snowball” and the “debt avalanche.” The snowball method has been popularized by personal finance celebrities like Dave Ramsey. By comparison, the debt avalanche is lesser known.
But which method actually works best? We did the math to find out.
First, list your debt from the smallest balance to the largest balance. Your goal is to eliminate the smallest debt first. You accomplish that by making only the minimum payment required on all your other debts. Then, take every extra dollar you have and put it toward the smallest debt. Once it’s paid off, you will throw everything into the next largest debt, plus an additional amount that is equal to whatever the previous debt’s minimum required payment was.
As you move from one debt to the next, you are creating an even bigger “snowball” to tackle your larger debts. That’s because you’re not only paying however much you can afford to set aside each month. You’re also adding to that amount when you add in the minimum required payments for each card that you pay off.
Why it works:
The snowball has two advantages. First, it provides you with a clear plan. Second, you build a lot of positive momentum by achieving wins early on, which will help you keep going.
To create a debt avalanche plan, list your credit card debt from the highest interest rate to the lowest. Pay the minimum due on all debt except the card with the highest interest rate. Put all extra money toward the most expensive debt until it is eliminated. Once that debt is paid off, take whatever you were paying on that bill and apply it to the next debt on your list, plus the minimum required payment from the debt you just paid off.
Why it works:
By dealing with debt that has the highest interest rates first, you can get out of debt faster and actually save more money on interest in the long run. It can feel more challenging than the snowball method, because you might be facing larger debt balances to start with. But the payoff is how much you’ll save on interest charges.
MagnifyMoney created a calculator that can easily help you see the difference between the snowball and avalanche methods.
Imagine you have three credit cards and can afford to pay $500 a month toward your debt:
● $2,000 on a credit union credit card with a 6% interest rate
● $6,000 on a credit card with a 19% interest rate
● $8,000 on a store card with a 28% interest rate
Using the MagnifyMoney calculator, you see you could save $1,301 by using the avalanche method instead of the snowball method. And that is not surprising: by eliminating high interest rate debt first, you will end up paying less interest overall. You would also be out of debt faster.
The bottom line:
Both strategies will work, but you should pick the one that best fits your personality. If you easily feel overwhelmed by debt and feel like quitting, you should probably try the snowball method. You’ll get early “wins” and feel lots of motivation to keep going. If you’re more disciplined, the debt avalanche strategy might be your best fit.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.