Ways to Get Out of Debt: Debt Avalanche vs Snowball

Being buried in debt doesn’t mean there isn’t a way out.

If you have multiple credit cards and carry a balance on them from one month to the next, each with its own interest rate, it can look impossible to get out from under those debts.

There is a way out. Two ways, in fact, stand out for their speed in eliminating debt.

Which one you choose depends a lot on your outlook of any progress made on digging out of debt and eliminating it entirely. Both have ominous names and sound like you’re in a snowstorm, but they’re easy enough to follow with a little discipline.

If you like seeing fast progress as proof of gaining ground on your goal, then a method called the debt snowball may work best for you.

The other, called a debt avalanche, doesn’t provide quick results. What it does best is lower the amount of interest paid on your credit cards.

If you have credit card debt that you carried into the coronavirus outbreak, or the pandemic caused your debt to spike as you use your cards more to pay bills, you’re not alone.

Juggling credit cards is becoming an American pastime.

A majority (52%) of Americans are carrying credit card debt, according to a U.S. News & World Report survey in May 2020. Nearly 17% of respondents carry more than $10,000 on credit cards, and 35% don’t know how much interest they’re paying each month.

Of those who do know, about 16% are paying at least $100 a month in interest, and about 7% are paying $200 a month.

“If you’re managing debt on multiple cards, just keeping up with so many monthly payments has got to be stressful,” said Beverly Harzog, credit card expert and consumer finance analyst for U.S. News, in a press release. “And with all that debt comes compound interest, which makes your debt get bigger and bigger.”

Two methods to get out of credit card debt can help.

A debt avalanche moves you out of debt fast by getting you out from under the highest interest rates first.

You start by making the minimum payment on each source of debt. Then you pay as much as you can afford on the credit card with the highest interest rate.

Once that highest debt is paid off, the extra repayment funds go toward the card with the next-highest interest rate.

The biggest challenge, of course, is having the money to do this.

Make sure you have enough money to pay your living expenses each month. Having a six-month emergency fund is also a good idea. Then use any money left over to pay down any debt you have with an interest rate attached. This can include:

Chances are your credit cards charge the highest interest rates. Start with those. A car payment is unlikely to have a minimum payment due. Depending on the interest rate, the car payment may be the last debt you tackle.

Sticking to a debt avalanche takes discipline. It works best if you don’t add more charges to the balances, and can mean putting off other expenses like home repairs.

The best thing about a debt avalanche that’s followed correctly is that the debt will be paid off quickly. Less interest accumulates by paying off the highest-charging credit cards first.

This happens because lenders use compound interest rates where interest accrues more quickly. Most credit card balances will compound interest daily.

A debt snowball is another type of accelerated debt payoff plan. It works by making the minimum payments on all debts, but paying any extra funds toward the smallest debt.

Once the smallest debt is paid off, you work toward paying off he next largest debt until the final, largest debt is paid off.

Once a debt is paid in full, add the old minimum payment and any extra amount available from the first debt to the minimum payment on the second-smallest debt.

Don’t worry about which credit card charges the highest interest rate. That’s not how a debt snowball works. Instead, you’re working to pay off credit card debts from smallest to largest, no matter what interest rate they’re set at, as a way to see some progress in getting out of debt.

This method ends up costing more in total interest charges, but it provides incentive by seeing debts paid off one by one.

Financial expert Dave Ramsey is a big proponent of the debt snowball. Ramsey argues that “quick wins” of paying off the smallest debt first is a strong motivation for eliminating debt overall.

Another popular way of getting out of debt is to consolidate it into a loan with a lower interest rate and then work to pay off that balance.

Credit cards can be consolidated through balance transfers to a credit card with a lower rate than the average of other cards with balances. Some balance transfer cards have a 0% introductory rate for a certain amount of time, such as a year, allowing consumers to pay off their debt without any interest.

Personal loans can also be used to consolidate debt. The app Fiona matches consumers with lenders. Even consumers with a low credit score of 580 can get unsecured loans from $1,000 to $100,000, and can get two to seven years to pay them off.

Fiona allows users to search for loans based on credit scores, location, loan amount and needs such as debt consolidation. Your estimated monthly payment will be listed, and you can then contact the lender to see if you want to proceed.

Another debt payoff method is to use a line of credit based on the credit card debts you have.

The mobile app Tally does this by giving you a line of credit and managing payments for you.

Instead of deciding yourself which credit card to pay off first, Tally calculates which method will save you the most money. It moves high APR balances to its line of credit, and the savings can be used to pay down credit card debts.

Whichever method you use to chip away at your debt, the key is to start doing it immediately. Interest rates are low now, providing a good opportunity to pay less interest and pay your debts off faster.

Not much is certain in life, but tackling your debts is a sure way to eliminate them.