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Credit card, mortgage and other debt balances are on the rise, thanks in part to a combination of inflation and high interest rates. Credit card balances were particularly affected, increasing by 5.8% in the year up to August 2024, with mortgages, home equity loans and car loan balances also seeing a bump.
If you’re one of the many Americans carrying a higher debt balance than you had a year ago, it might be time to start paying it down strategically.
Here’s where the debt snowball and debt avalanche methods come in. These debt strategies provide a simple structure to pay off what you owe across multiple credit accounts, one debt at a time. Which method is best for you ultimately depends on the type of debt you have and how you’re typically motivated to see a plan through to success. In many cases, you may want to combine methods or other debt repayment strategies, such as debt consolidation.
Debt snowball method: What it is and how it works
With the debt snowball method, you order your debts by size of outstanding balance and make minimum payments, putting any extra money in your debt-payoff budget toward your credit account with the smallest balance. As you pay off one balance, you put your extra money toward the next smallest debt on your list until all debts are paid.
This method allows you to pay off smaller debts and close accounts more quickly than other methods, setting you up for a series of quick wins in the beginning — especially if you have a mix of low- and high-balance accounts.
The main advantage of the debt snowball method is that it’s motivating. If debt makes you anxious, or you’ve been discouraged by debt repayment strategies in the past, this may be a good method to start with — even if you switch to the avalanche method later. The psychological reward of this method could be enough to keep you going when others failed you.
Another advantage is that it reduces the number of monthly payments you have to make more quickly than the debt avalanche method. This means that you’ll have more money to put toward your next account more quickly, accelerating the process. However, even with the extra money to pay down your accounts, it still may not offer as much interest savings as the debt avalanche method.
Debt avalanche method: What it is and how it works
With the debt avalanche method, you order your debts by interest rate and make minimum payments, putting any extra money in your debt-payoff budget toward the credit account with the highest APR. As you pay off one balance, you put your extra money toward the next largest interest rate on your list until all debts are paid.
This method allows you to avoid paying more than you need to on interest, since interest accumulates more quickly on high-APR accounts. You can generally benefit from this the most when you have accounts with a wide range of APRs — especially across different types of debt, like personal loans and credit cards.
Another advantage is that the debt avalanche method may help you get out of debt more quickly than the debt snowball method. That’s because it stops your highest-interest debts from accumulating interest as quickly as they would without targeted payments.
The main disadvantage of the debt avalanche method is that it can be more difficult to stick with — especially if your high-interest accounts also have the highest balances. That’s because it can feel like you’re not making any progress if it takes over a year to pay down your first account, and that can make you want to quit.
That’s why many people start with the debt snowball method for the first few months and then switch over to debt avalanche — especially if they have several accounts with low balances.
Dig deeper: Top tips for paying off your credit card debt — from a financial expert
Debt snowball vs. debt avalanche method: Step by step
Getting started with the debt snowball or debt avalanche method involves the same steps with one key difference: which accounts you prioritize. Here’s how it works.
Step 1: List out your credit accounts
Make a list of all of your credit card accounts and loans — ideally in a spreadsheet. Include columns for each balance, APR and minimum monthly payment required to avoid fees or penalties.
💡 Expert tip: How to avoid prepayment penalties
If you’re including personal loans on your list, confirm with your creditor that it doesn’t charge a prepayment penalty. A prepayment penalty is a fee lenders charge when you repay a loan early, effectively canceling out any interest savings. Prepayment penalties aren’t common, but they do exist. And if you’re on the hook for this fee, don’t include these types of loans in your debt payoff list — you’ll save more money by prioritizing other accounts.
Step 2: Rank your accounts
This is the only step where the debt snowball and debt avalanche diverge:
For a debt snowball, rank your accounts by outstanding balance, from smallest to highest. This will be your order of priority.
For a debt avalanche, rank your accounts by APR or interest rate, from highest to lowest. This will be your order of priority.
Take stock of your monthly income and expenses. Be sure to include minimum monthly payments on all accounts and contributions to savings accounts — such as your emergency fund and retirement contributions.
Note how much money you have left over after expenses, and dedicate a portion of those funds toward extra payments on your accounts — your smallest balance for debt snowball, or your highest interest rate for debt avalanche.
Step 4: Pay down your accounts
Schedule extra monthly payments for your top priority account while continuing to make the minimum monthly payments toward all other debts on your list. Once you’ve paid down your focus debt, use the money you’d budgeted for payments toward the next priority account on your list. Continue this way down your list until you’ve paid off your accounts — and you’re debt-free!
Dig deeper: Top debts to prioritize paying off before retirement
Examples: Debt snowball vs. debt avalanche
The best way to get a sense of how these repayment strategies compare is to look at a few examples.
Example 1: Similar balances, different rates
Say you’re paying off a credit card, a personal loan and a car loan and have $100 to put toward an extra payment. They all have a similar balance, but because they’re different products, the interest rates vary dramatically.
Let’s take a look at the timeline and savings it would take to pay down the debt with the smallest balance versus the debt with the highest APR:
Debt snowball method. Putting $100 extra dollars toward the $6,500 personal loan with two years left on the term would get you out of debt six months early and save you $214 in interest, compared with making the minimum monthly payment only. It would take you 18 months to pay down your first account.
Debt avalanche method. Putting $100 extra dollars toward the 27.5% APR credit card would get you out of debt 31 months early and save you $3,408 in interest compared to making the minimum monthly payment. It would take you 33 months to pay down your first account.
In this case, the avalanche method may seem like a clear winner for most people. It’ll take more than a year to pay down your accounts regardless of which method you choose, and the avalanche method savings are difficult to ignore. Beyond that, if you don’t choose to pay down your credit card first, that credit card balance will continue to grow while you’re paying down the personal loan, and you could likely owe thousands more. For example, if you continued making only minimum monthly payments, you’d pay a total of $6,378 in interest by the time you paid off your card balance.
Example 2: Similar rates, different balances
Say you have several credit cards with varying levels of debt and $100 to put toward an extra payment. Because they all have variable interest rates and your credit score was roughly the same when you opened the accounts, they all have about the same interest rate.
Let’s take a look at the timeline and savings it would take to pay down the debt with the smallest balance versus the debt with the highest APR:
Debt snowball method. Putting $100 extra dollars toward the $500 credit card would get you out of debt 23 months early and save you $145 in interest, compared with making only the minimum monthly payment. It would take five months to pay down that account.
Debt avalanche method. Putting $100 extra dollars toward the 28.1% APR credit card would get you to the point where you’re able to start paying off the accumulated interest, though it would take 42 months to get out of debt. You would also spend $3,119 in interest payments — but at least you’d pay down that account, eventually.
Neither debt repayment strategy is an ideal choice here, but the avalanche method has an advantage. It’s true that using the snowball method would give you an easy win, but it would allow your $5,500 credit card to grow rapidly, meaning it’d take more time to pay off by the time you get around to it. However, the 42 months it would take to pay down your highest-interest account — that’s three and a half years — may be discouraging. Following the debt avalanche account also doesn’t account for the fact that the card with the second-highest APR has a balance that would continue to rapidly grow during this period.
In this situation, you might want to consider consolidating your debt with either a balance transfer credit card or a personal loan, using the funds to pay down your credit card accounts. Balance transfer credit cards typically offer a 0% APR introductory rate, which can last from 12 to 18 months, meaning that you won’t have to worry about accumulating interest during that period.
If you don’t think you can pay down your debt within a credit card’s introductory period, debt consolidation with a personal loan may be a better option. Personal loans generally have lower interest rates than credit cards and give you one fixed monthly payment over a term of around three to five years.
To qualify for either option, you need a good credit score of at least 670 and a debt-to-income ratio below 50%.
Dig deeper: What is a debt consolidation loan — and how can it help you lower your interest rate?
Example 3: Different rates, different balances
Say you have a HELOC in repayment with 10 years left on the term, a car loan and one unpaid credit card account. You have $100 to put toward an extra payment.
Here’s what the timeline and savings might look like if you pay down the debt with the smallest balance versus the debt with the highest APR:
Debt snowball method. Putting $100 extra dollars toward the $750 credit card would get you out of debt 45 months early and save you $471 in interest, compared to making only the minimum monthly payment. It would take seven months to get out of debt.
Debt avalanche method. Putting $100 extra dollars toward the 27.6% APR credit card would get you out of debt 45 months early and save you $471 in interest, compared to making the minimum monthly payment. It would take seven months to get out of debt.
In this case, the debt snowball and debt avalanche method would point you toward the same account: the credit card. With both the highest APR and the smallest balance, paying down your credit card can both motivate you and offer some high savings.
However, you may also want to consider other options for your HELOC and car loan to lower your rate — if interest rates are on the decline. During a low-interest period, consolidating your HELOC with a fixed-rate home equity loan can help you lock in a lower interest rate for the rest of your term. Refinancing your car loan at a lower rate can also help you save on the total cost.
Dig deeper: Home equity loan vs. HELOC: Which is best for borrowing against your equity?
How to get the most out of your debt payoff strategy
Follow these tips to keep your personal finances in shape while you’re paying down your debt.
Don’t neglect your savings. Count retirement account and emergency funds contributions as part of your monthly expenses when budgeting for a debt repayment plan. For your emergency fund, you should have enough money to cover three to six months of expenses.
Stay current on all of your bills. Falling behind on other bills can lead to late fees and other penalties that can add to your debts. If you have an unexpected expense, prioritize that over the extra payment you’d planned on putting toward your list’s focus debt.
Leave your credit card accounts open. Closing your cards after you’ve paid them off can actually hurt your credit score. That’s because the second most important factor in your credit score is your credit utilization ratio — or the amount of credit you have access to, versus the amount of debt you owe. Keep those accounts open for a credit boost, even if you don’t plan to use them.
Combine or switch strategies if it’s not working. Many people find that one strategy isn’t right for their entire debt repayment journey. One popular method is to pay down as many accounts as you can in three to six months before switching to the debt avalanche method.
Dig deeper: 5 popular budgeting strategies — and how to find the best fit for how you save
Alternatives for paying off debt
Here are a few other methods you may want to consider when you’re paying down debt. You can use one of these as an alternative or in combination with a debt repayment strategy.
Balance transfer credit cards. These credit cards transfer over high-interest debt from one or more credit cards to save on interest and simplify your payments. They typically extend a 0% introductory APR for up to 18 months, offering major interest savings — but you’ll want to prioritize paying off your balance in full within the intro period.
Debt consolidation loans. These personal loans are used to consolidate and pay off your debt. They are best for credit card debt and other high-interest unsecured debt that you need a few years to pay off. You can’t use them for home, auto or student loans.
Home equity loans or HELOCs. Tapping into your home’s equity can offer even more savings than a personal loan for consolidating your debt, offering lower interest rates. Like a debt consolidation loan, can use the funds from a HELOC or home equity loan to pay down most types of unsecured debt. But if you aren’t able to repay what you borrow, you risk losing your home to foreclosure.
HELOC refinancing. This option involves taking out a new home equity loan or line of credit, using the payout to pay off your old balance. Refinancing with a home equity loan can be particularly advantageous during a low-interest period, just make your potential savings outweigh costs or fees that come with refinancing.
Car loan refinancing. With auto loan refinancing, you take out a new car loan and use the funds to pay down your old account. If interest rates are lower now than they were when you took out your initial loan, you may be able to find a lower rate than you’re currently paying.
About the writer
Anna Serio-Ali is a trusted lending expert who specializes in consumer and business financing. A former certified commercial loan officer, Anna’s written and edited more than a thousand articles to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in Business Insider, CNBC, Nasdaq and ValueWalk, among other publications, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
Article edited by Kelly Suzan Waggoner
