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2 Ways to Pay Down Your Debt: Avalanche and Snowball Methods

2 Ways to Pay Down Your Debt: Avalanche and Snowball Methods

If you’re getting into the “New Year, New You” state of mind, you may have credit card or other debt on your target list of improvements. Many people take stock of their debt at year-end and set goals for paying off, or paying down, any debt they’ve accumulated. Reaching those goals requires an intentional strategy, as well as discipline.

Financial experts often recommend one of the two common strategies for accelerating the repayment of debt: the debt avalanche method and the debt snowball method. Here’s information about each of these approaches to help you determine which may be right for you.

Debt avalanche: Save money on interest payments

The debt avalanche strategy is based on repaying the bill with the highest interest rate or annual percentage rate (APR) first. You continue to make the minimum monthly payments on all of your accounts but then put as much extra money as you can toward the highest-interest-rate account. This method can save you money because you won’t be accumulating so much in interest charges. This method can save you money because you are prioritizing the payoff of high interest rate accounts first, reducing your total interest expense. You may be able to repay your debt faster, too, since the total repayment amount will be lower.

If debt avalanche feels right to you, start by looking at your account statements to see what rate of interest you’re paying on each outstanding balance, and then list the accounts in rank order, with the one charging the highest rate of interest on top and the one with the lowest rate on the bottom. Stick with your plan of paying more than the minimum on the account in the #1 spot every month, as you make the minimum payment on the others. Once you’ve paid off the highest-interest account, strike it off your list and begin repaying the account that now moves up from #2 to #1 on your list and so on.

If that #1 account you just paid off is a credit card account, commit to not using that card unless you know you can pay off the balance in full each month. Adding to your debt total will set back your efforts to reach your repayment goals. Consider using a debit card when you can; then your checking account will cover any purchases, with no accumulation of new debt.

Debt snowball: Momentum motivates

The debt snowball strategy can give you a psychological boost to help you keep moving toward your repayment goal. As with the debt avalanche method, begin by making a list of your outstanding account balances. This time, though, instead of ranking them based on their interest rates or APRs, go strictly by the amount of the total balance. The idea is to pay off the smallest balances first and work your way up to the larger balances.

For example, if you have four accounts with respective balances of $250, $500, $1,000 and $2,500. You may be able to knock off the $250 debt very quickly and take it off your target list. In this example, the $250 balance would take the #1 spot, $500 would be #2 and so on. Remove each account from the list as you pay it off and commit to not using that account unless you are certain you have the funds to pay the new balance in full each month.

Is debt avalanche or debt snowball right for me?

You know yourself better than anyone. If it’s your priority to pay the least amount of interest possible, the debt avalanche method can help you achieve that goal. If you’re someone who needs to see faster progress to stay motivated, the snowball method may be more appropriate for you. The strategy you choose is up to you. Either one can help you focus on repaying your debt more quickly than if you were simply making the minimum monthly payment each month.

Could debt consolidation be a better option for me?

Debt consolidation — bringing multiple balances together under one loan or credit card — can help streamline your personal finances and simplify your budget by requiring just one payment versus multiple payments each month. Depending on your creditworthiness and the consolidation option you choose, you may also be able to reduce your interest rate, pay less each month and pay your debt off more quickly. Learn more about debt consolidation.

Tools to help you set goals and manage your debt

As you set goals for repaying your debt, Dollar Bank’s financial calculators can help:

  • Our Credit Card Payoff Calculator can show you how long it will take you to pay off an individual credit card balance based on your planned monthly payment.
  • If you have a specific time line in mind for paying off your debt, our Debt Payoff Goal Calculator can help you see how much additional you’d need to pay each month to meet that goal.
  • Dollar Bank’s Debt Consolidation Calculator can help you get an idea of how debt consolidation might change your monthly payment, total interest costs and the time it would take to pay off your debt.

To learn more about debt solutions, visit your local Dollar Bank office or call us at 1-800-242-2265.

This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant or other advisor regarding your specific situation.


Posted: December 08, 2023