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Pay off debt: snowball or avalanche?

4 min read

Two common ways to pay down several debts, explained side by side so you can pick the one that fits you.

If you owe money on more than one card or loan, it can be hard to know where extra cash should go. There is no single right answer. This guide explains two well-known methods and what each one trades away.

Step 1: Write everything down

List each debt with its balance, its interest rate and its minimum payment. The US Consumer Financial Protection Bureau (CFPB) has a debt reduction worksheet that asks for your bills and interest rates, so gather those first. A bill calendar, which shows when each payment is due, also helps you plan.

Step 2: Pay the minimum on every debt

Both methods start the same way. You keep making the minimum payment on all your debts. The difference is where any extra money goes.

Method A: Highest interest rate first (often called "avalanche")

Put your extra money toward the debt with the highest interest rate, such as a credit card. The CFPB describes the aim as clearing your costliest debts first.

• Good: it can save money over the long run.
• Trade-off: progress may not feel obvious, because the first debt you attack might be a big one.

Method B: Smallest balance first (often called "snowball")

Put your extra money toward the smallest balance. When it is gone, add its payment to the next smallest debt, and keep going. The payments grow like a snowball.

• Good: you see debts disappear quickly.
• Trade-off: you may pay more overall, because larger or costlier debts are not the focus.

An example

These are made-up amounts, in no particular currency. Say you have three debts: Card A with a balance of 300 and a lower interest rate, Card B with a balance of 2,000 and a high interest rate, and a loan with a balance of 5,000. You can spare an extra 100 a month beyond the minimums.

• Method A sends the extra 100 to Card B, the highest rate.
• Method B sends the extra 100 to Card A, the smallest balance. Once Card A is cleared, its payment moves on to Card B.

Neither is wrong. The CFPB frames the choice around what motivates you: the highest-rate method if saving the most money matters most, or the snowball if seeing progress quickly does. Whichever you choose, we suggest writing down the next debt in line, so the plan is clear on a tired day.

If a debt collector contacts you

The CFPB says it is worth finding out whether you really owe the debt. In the US, a collector must give you the creditor's name, the amount owed and how to dispute it. The CFPB also says that ignoring collectors is unlikely to stop them contacting you. Collection rules differ by country, so check the rules where you live.

If you are thinking of a new loan to pay off old ones

A new loan is not always the right step, and this guide does not suggest one. If you are weighing one, Your Europe, the EU's official guide for citizens, gives a few points for consumer credit in the EU:

• Compare offers using the standard information form that lenders must give you before you sign.
• The APR is a single figure showing the total cost of the credit, including interest and fees.
• You can withdraw from the agreement within 14 calendar days, if you repay the money borrowed, the interest and any non-refundable charges.
• You can repay early. The lender may ask for compensation, but it is capped at the interest it would have earned.

Your Europe says these rules cover loans from 200 to 75,000 euro, and that some types of loan are excluded. Outside the EU, such as in the US or UK, the rules can differ, so read the terms you are given.

A small plan to start

Our suggestion, not a rule: choose one method, pick the one debt that gets the extra money, and review the list when a balance changes. If the plan stops feeling realistic, adjust it rather than give up.