Paying off debt: the avalanche and snowball methods
In short: list your debts, keep up the minimum payment on all of them, and put any extra money towards one at a time. The avalanche method targets the highest interest rate first and usually costs the least. The snowball method targets the smallest balance first and gives quicker wins. Either beats paying only the minimums.
Step 1: list your debts
For each card or loan, write down the balance, the APR and the minimum payment. Then decide how much you can pay in total each month, using the budget planner.
Step 2: choose a method
- Avalanche: pay the minimum on everything, and every extra dollar goes to the debt with the highest APR. When it is paid off, move to the next highest.
- Snowball: pay the minimum on everything, and every extra dollar goes to the smallest balance. Each debt you clear frees up its payment for the next one.
A worked example
Three debts totalling $7,800: Card A $3,000 at 24% APR (minimum $90), Card B $800 at 18% (minimum $25) and a loan of $4,000 at 9% (minimum $120). The person can pay $400 a month in total and adds no new debt.
| Approach | Debt-free in | Total interest | First debt cleared |
|---|---|---|---|
| Avalanche ($400 a month) | 23 months | about $1,076 | Month 14 |
| Snowball ($400 a month) | 23 months | about $1,128 | Month 5 |
| Minimums plus a little ($235 a month) | 45 months | about $2,767 | Month 39 |
In this example the avalanche saves about $50 in interest, while the snowball clears the first debt nine months sooner. The biggest saving comes from paying more each month. Figures are rounded and for illustration only.
Other things that can help
- Stop adding new debt while you pay down the old.
- Ask your lender for a lower rate or a hardship plan, especially if your income has dropped.
- A balance transfer or consolidation loan can lower the rate, but check the fees, the rate after any introductory period, and the APR of the new loan.
- Keep a small emergency fund so a surprise doesn't push you back into debt. See Emergency fund basics.
If you can't keep up
Contact your lenders before you miss a payment. A reputable non-profit credit counselling agency can help you make a plan. Be careful with debt settlement companies that charge upfront fees or tell you to stop paying your lenders. If a debt collector contacts you, you have rights under federal law: the CFPB explains them.
Handy tools
- Loan and EMI calculator: monthly payment, total interest and a year-by-year table.
- Monthly budget planner: see what is left each month and how your spending splits up.
General information, not financial advice. Rules, fees and rates change and depend on your situation. Check with your bank, the provider or a qualified professional before you decide.
Sources
- CFPB: Debt collection
- CFPB: Credit cards
- CFPB: Do I pay interest on new purchases after a balance transfer?
- MyMoney.gov: Borrow