Two of the most popular strategies for debt elimination are the debt avalanche and debt snowball methods. More often than not, the debt snowball method is cited as the “best” way to pay off debt. However, despite having a reputation for being a bit more difficult than its snowball counterpart, the debt avalanche method is equally as effective — and often better.
Here’s when you may decide to use the debt avalanche to pay off debt and some of the hidden benefits to using this debt repayment strategy.
Debt Snowball and Debt Avalanche: What’s The Difference?
What’s the difference between snowball and avalanche methods?
Let’s start with the debt snowball. A debt snowball means you begin paying off debt with the smallest balance first. As you pay off that debt, you continue to put minimum payments towards any other debts. This allows you to “snowball” your way toward paying off debts with bigger balances. The debt snowball is considered a psychological attack on debt as it allows you to earn a few financial wins and boost confidence about paying off your debt.
The debt avalanche method, on the other hand, starts by targeting the debt with the highest interest rate first. As you target the debt with the highest interest rate, you continue to make minimum payments on any other debts. Once this debt is paid off, you move on to pay off the next piece of debt with the highest interest rate. There are fewer quick wins associated with the avalanche method, but overall the approach works to save on interest payments.
Debt Avalanche’s Hidden Benefits
There are two hidden benefits for borrowers that use the avalanche method to pay off debt.
Save on Interest Payments
The first benefit is that the debt avalanche method is focused on interest rates. Interest is the cost of borrowing money. David Frederick, Director of Client Success and Advice at First Bank, said borrowers using an effective avalanche strategy can save on interest payments in the long run.
Before using a debt avalanche strategy, borrowers should consider how much debt they have and the interest rate associated with each form of debt.
“The longer a borrower carries high-interest debt, the more they will pay for the borrowed money over time,” said Frederick. “If a borrower has several debts with various interest rates, paying down the highest interest rate debt first will minimize the total cost of borrowed funds.”
Speed Up Getting Out of Debt
The second benefit of the debt avalanche method is time. Gabe Krajicek, CEO of Kasasa, said using the debt avalanche method helps minimize the amount of interest paid by a borrower. Ultimately, this lessens the amount of time it takes to get out of debt.
“Once a debt is paid off, it will no longer accrue interest against the borrower,” said Frederick.
Debt Avalanche Do’s and Don’ts
Debt snowball, Krajicek said, gives borrowers intangible psychological lifts. The strategy builds confidence and boosts morale. In contrast, debt avalanche is a purely logical strategy and focuses on tangible numbers.
Keeping this in mind, Krajicek recommends the following do’s and don’ts for using the debt avalanche method.
Do: Stay Motivated
Unlike the snowball with its steady wins, those who decide to use a debt avalanche strategy require consistent motivation. This choice is the mathematically sound choice. It is the smartest way to pay off debt that allows you to save time and money.
Krajicek recommends coming up with a motivational mantra.
“Give yourself a mantra to stay motivated, like even the largest avalanche can be triggered by the smallest snowflake,” said Krajicek.
Do: Set Milestone Goals
Just because the avalanche strategy doesn’t have the clear, quick wins associated with the snowball strategy doesn’t mean someone using debt avalanche can’t replicate those wins.
Krajicek uses the example of setting a milestone goal like “reduce my debt by $1,000 by New Year’s Day.”
“Having a specific dollar amount and date to achieve the goal creates an opportunity to celebrate a win,” said Krajicek. “This can replicate the same type of motivation that would have come from the quick wins of the snowball method.”
Don’t: Get Discouraged
You may notice a slight dip in your credit score if you decide to use the debt avalanche method. If so, Krajicek said don’t be discouraged by this news.
“This can happen due to your credit utilization rate, which ideally should be below 30% on each card,” said Krajicek. “If you have maxed out credit cards that are receiving minimum payments while you are chipping away at your highest interest rates, this could be affected.”
Can Debt Avalanche and Debt Snowball Be Used Together?
It is possible to use both strategies together when paying off debt.
Frederick said that a borrower should look for the “sore thumb” debt. This is the debt that is an outlier, such as debt with an unusually high interest rate or unusually low balance. Borrowers may address the sore thumb first with targeted payments.
If there is no sore thumb debt, borrowers may be unsure if debt snowball or debt avalanche is the best strategy for their debt. Frederick recommends reaching out to a professional financial advisor for an analysis.
“Financial advisors have sophisticated tools that can model out different repayment strategies for different loans,” said Frederick. “They can help borrowers choose a repayment plan as part of a larger financial plan.”
This financial plan may recommend an avalanche repayment — or it may recommend using a snowball repayment. “Every borrowers’ circumstance may be different,” said Frederick. “An individualized financial plan may help identify the best course forward.”
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