If you’re in debt, you’ve probably heard of snowy terms like the snowball method vs. debt avalanche method. But how do they work?
How can these methods help you stop the dread and havoc that your debt might be causing within your wallet?
Grab a hot cocoa and your favorite cozy blanket. We’ll help you break the ice with financial knowledge and actionable steps you can take home with you.
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👀 7min read
A debt snowball is exactly what it sounds like: a giant “ball” of debt.
It’ll keep growing, like a snowball rolling down a hill – or not, thanks to a method of paying off debt with the same name. ;)
Like a snowball, you start small. Then, you gradually “increase” your debt repayment to tackle larger sums of debt later on.
Alternatively, you could use the debt avalanche method.
Like an avalanche, interest rates don’t hold their punches. So you start from big to small, with the loan that’s charging you the largest amount of interest.
So, which one is better? Snowball vs. avalanche?
Before we play the “snowball vs. avalanche” game, you need to understand where you’re at with your debt.
Find out the answer to these questions:
If you can’t answer these questions, there’s a good chance your debt might be snowballing behind your back.
That’s where strategies like the snowball method and the avalanche method are helpful.
The main goal for these debt-repayment strategies is to reduce the “snowball effect” debt can have in your finances, so you can pay off your debt – and become financially free – in the FASTEST amount of time.
Plus, when you have a framework to work with, you feel more confident and empowered to chip away at your debt, and live your life holding your head up high.
Let’s get to it!
If your debt “snowballs” – aka spirals out of control – you may end up in more debt than when you started. Here’s how you can avoid that.
1: Make your payments regularly and ON TIME.
Set up auto-payments from your checking account. Timely payments protect your debt from the snowball effect. It also keeps your credit score happy, so it’s a double-win.
2: Pay a little over the minimum payment.
The minimums established by your bank or lender are (often) mostly interest. Even a small amount like $20 can go a long way to chip away at the amount you “actually” owe, and clear debt faster.
3: Consolidate or refinance your debts, if possible.
Most financial institutions will be happy to help you refinance or consolidate your loans. (They want the merit of being your bank/lender of choice, afterall).
When you have multiple loans, it’s easier to try and consolidate or refinance them first. However, that’s not always possible. That’s where methods like the snowball debt method or the avalanche method come in!
How do these methods work in practice?
Let’s say you have $2,000 in credit card debt, plus another $10,000 for a car loan, and $50,000 in student loans.
With the snowball method, you pay the smallest loan first:
You’d cover the minimum for all 3 loans (credit card, car loan, and student loan). But you’d also pay as much as possible to cover your $2k credit card debt. Once that’s gone, you move on to the next loan.
Now, let’s say your credit card has a 22% interest rate, your car loan is at 4% and your student loan is 6%.
With the avalanche method, you pay the highest interest rate loan first:
Again, you cover the minimum payments on ALL of your current loans. You then pay as much as you can off your “chosen” loan. The credit card amount has the largest interest rate at 22%, so that’s where you would start in this example.
The avalanche method is arguably better. If your debt is snowballing out of control, interest rates and hidden fees are often the culprits. So when you focus on tackling the most troublesome (aka. highest) interest rates first, you’ll pay off debt faster.
However, if your debt has already reached its highest peak, the snowball method might be the way to go. Starting small may feel easier. Plus, you get to celebrate “quick wins” earlier, since you can pay off smaller loans within months, vs. waiting 10 years to pop the champagne.
Like we said earlier, the first step to pay off debt is to understand it.
That’s why Penny Finance exists. We provide easy and direct financial advice for women, so you have the tools and knowledge to make better (and bolder) choices with your money.
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