How to get out of debt: avalanche vs. snowball

The two methods differ in only one way

Both methods pay the minimum on every debt each month. Both send all your spare money to one target. When a target clears, its old minimum joins the spare money and moves to the next target. The only difference is which debt goes first:

• Avalanche goes after the highest APR, so the most expensive dollars disappear first.
• Snowball goes after the smallest balance, so whole debts disappear sooner.

So the total you pay each month is the same under either method. The choice changes how interest adds up and when you get your first win.

How much does avalanche really save over snowball?

Anywhere from nothing to a few thousand dollars, depending on how your rates and balances line up. These three sets of debts all get $300 a month on top of the minimums.

In the first list, the $1,800 store card is both the smallest debt and the highest rate, so the two methods make the same payments. In the second, 21.99% to 26.99% is a narrow range, and the methods end up $546 apart, about $17 a month. In the third, snowball spends 4 mos paying a bill that charges no interest while the 27.99% card keeps growing, and that costs $2,377.

Enter your own list in the debt payoff calculator. It shows avalanche, snowball, and your own order side by side, so you don't have to guess where you fall.

How to choose the right method for you

Run both on your numbers, then divide the dollar gap by the months snowball's first win saves you. That's the price of a quicker win. Then ask if you'd pay it. No formula can say how you'll feel in month 14, so here's a rule of thumb:

• Choose avalanche if the gap is large for you, or if you tend to stick with a plan once it's set up. Autopay makes that easier.
• Choose snowball if the gap is small, or if past attempts stalled because nothing seemed to change. In the card example, snowball clears a debt in 9 mos, and avalanche's first win takes 2 yrs.
• Blend them when one tiny debt stands out. Using "My order" on the third list, clear the $1,200 bill first, then go highest rate first. You get a win in 4 mos and pay $444 more than pure avalanche, far less than the $2,377 of pure snowball.

What matters more than the method

The monthly amount beats the method at almost every step. Here's the three-card list at different extra payments. Notice how little the two interest columns differ in any row, and how much each column falls as you go down.

Don't let your payment shrink. Rollover does a lot of the work. Spend each freed minimum instead of moving it to the next debt, and this plan takes 3 yrs 2 mos rather than 2 yrs 8 mos, costing $354 more in interest.

Don't let minimums fall, either. Card minimums usually drop with your balance. Paying only the falling minimum can stretch a card to many years, as the credit card payoff calculator shows. Pick a fixed dollar amount and keep paying it.

Stop adding to the pile. Either method assumes no new charges. If a card is still in daily use, the payoff date is only a hope. Our budget calculator can help you find the money.

Which debts should not follow the normal order?

A few types of debt need their own handling, whatever method you use.

• Deferred-interest promos. A "no interest if paid in full" offer looks like 0%, so avalanche ranks it last. But if any balance remains at the deadline, interest going back to the purchase date can land on your account. Plan to clear it before then, and treat that date as the true priority.
• Federal student loans. Income-driven plans change the math. On the Repayment Assistance Plan, unpaid interest can be waived when you pay on time, so the stated rate may not be what you actually pay. Check your plan with the student loan calculator before sending extra money there.
• Secured debts. As a rule of thumb, keep your mortgage, rent, and car payment current before making extra payments anywhere else. A low rate doesn't make a missed payment cheap if it puts your home or car at risk.
• A cash cushion. Another rule of thumb: keep a small emergency fund while you pay down debt, so a car repair doesn't go straight back on a card.

When does a consolidation loan or balance transfer make sense?

It makes sense when the rate after fees is clearly lower, you keep paying about the same total, and you've stopped adding new debt. The CFPB warns that if overspending caused the debt, consolidation probably won't help unless spending falls. It also notes that a lower payment may just mean a longer term, which can cost more overall.

Here's that trap in numbers. Suppose you consolidate the $22,000 of cards with an example 14% loan and a 5% origination fee taken from the proceeds. To net $22,000, you borrow $23,158, and the true APR is 16.33%. Your actual offer will differ.

The lower payment is the most tempting row, but it costs the most, $2,153 more than staying on the cards. Keep paying $960 on the loan, and you save $2,823 and finish sooner. The win comes from the rate only if the payment holds. Test your own offer with the personal loan calculator, and use the APR calculator to compare fees.

A balance transfer can work if you can clear most of the balance during the promo, but expect a fee, and watch for the loss of your grace period on new purchases. A home equity loan is riskier, because the CFPB notes you could lose your home in foreclosure if you can't repay.

When to call a credit counselor

Call one if your minimums don't fit your budget, you're missing payments, or you can't qualify for a better rate. A counselor reviews your whole budget. Under a debt management plan, you make one monthly deposit and the agency pays your unsecured debts. The FTC says these plans can take 48 months or more, and they don't cover debts secured by a house or car.

The benefit depends on the terms your creditors accept. As an illustration only, take $22,000 at a blended 25.35% with $660 a month and no extra. That takes 4 yrs 11 mos and costs $16,459. If a plan lowered the rate to 10%, the same payment would clear it in 3 yrs 4 mos for $3,881 in interest, before any plan fees. Ask for the actual rates and fees in writing.

Good places to look, per the FTC, include credit unions, universities, and U.S. Cooperative Extension offices. Military members can ask their personal financial managers. The FTC also warns that nonprofit status doesn't guarantee low fees, and that no legitimate counselor recommends a plan without carefully reviewing your finances. You can also call creditors yourself for free and ask for a lower-payment plan.

What about debt settlement or bankruptcy?

Treat debt settlement with caution. The CFPB says these companies typically encourage you to stop paying your bills, which can lead to late fees, credit damage, and lawsuits. Under FTC rules, they can't collect fees before settling your debt, so anyone asking for money upfront is a red flag.

Forgiven debt can also be taxable. If a creditor accepts $6,000 on a $10,000 balance, the $4,000 canceled is generally income, and you may get a Form 1099-C. An exception applies to the extent you're insolvent, so ask a tax professional.

Bankruptcy is usually a last option because of its long-term effect on your credit, but it exists for a reason. If your debts can't realistically be repaid, a bankruptcy attorney can explain the options. Credit counseling from an agency on the U.S. Trustee Program's approved list is required before you file, with very limited exceptions.

Your first week: five steps

1. List every debt with its balance, APR, and minimum. Your latest statements have all three.
2. Run the list in the debt payoff calculator, and note the dollar gap between the methods.
3. Pick a fixed monthly total you can keep up, even in a tight month.
4. Set autopay for each minimum, then schedule the extra payment to your first target.
5. When a debt clears, move its minimum to the next target that same day.

Common questions

Sources

1. How To Get Out of Debt · Federal Trade Commission
2. What do I need to know about consolidating my credit card debt? · Consumer Financial Protection Bureau
3. What is a debt relief program and how do I know if I should use one? · Consumer Financial Protection Bureau
4. How to understand special promotional financing offers on credit cards · Consumer Financial Protection Bureau
5. Topic 431: Canceled debt, is it taxable or not? · Internal Revenue Service
6. Credit counseling and debtor education information · U.S. Trustee Program, Department of Justice
7. Top FAQs About Income-Driven Repayment Plans · Federal Student Aid