Should You “Snowball” Your Debts?

Sometimes, the most logical or efficient method of completing a task doesn’t always turn out to be the best or most effective method. A great example of this paradox can be seen in the world of consumer debt, specifically when it comes to choosing the best method to prioritize and pay down multiple debts.

The two most common methods of attacking multiple debts have winter-themed names that elicit a decent visual representation of what goes on: the avalanche method and the snowball method. Both methods require you to make your minimum payments across all of your debts (not doing so can cause long-term credit damage), but have separate approaches on how you should allocate your remaining debt-repayment funds.

On paper, the avalanche repayment priority plan makes the most financial sense and is generally recommended to those struggling with large debts. At the same time, some studies have shown that snowballing your debt can be more effective in the long run.

The Avalanche Method

With the avalanche repayment method, the focus is to pay down debt while paying as little in interest fees as possible by focusing on the interest rate being charged for each debt, rather than the size of the debt itself. Under this plan, you would pay down the debt with the highest APR first, then the next-highest APR, and so on.

Not only does avalanching your debt save you more money overall, you can generally pay down debt faster. That’s because your debt is growing at a slower rate, plus less of your payment is going to interest fees, meaning more of your payment goes toward your actual balance. As you pay off your highest-interest debts and get to those with smaller APRs, an increasingly larger portion of your payments are paying down debt rather than interest fees.

The main downside to the avalanche method is more psychological than financial. Essentially, if your highest-interest balance is also large, it can take a significant period to pay down. This can mean months, if not more than a year, of seeing only marginal progress on your overall debt, which can cause some people to lose momentum as the months wear on.

You may be able to speed up the process by reducing the amount of interest you’re being charged on your debts. For example, depending on the state of your credit score, you may be able to transfer some of your high-interest credit card debt to a balance transfer credit card with a lower APR. If you have good to excellent credit, you can even qualify for introductory 0% APR offers from the best balance transfer cards.

Even with less-than-awesome credit, you may still be able to find a way to reduce your rates, particularly if you’re stuck with high-interest credit card debt. As with most installment loans, personal installment loans for bad-credit borrowers often have lower APRs than credit cards within the same credit score range.

The Snowball Method

As cost-effective as the avalanche method may be, however, it does lack one thing that the snowball method offers: a speedy path to gratification. That’s because the snowball debt repayment method prioritizes your debts in order of their size, rather than their interest rates, starting with your smallest debt and working your way up to your largest debt.

The benefit of focusing on your smallest debt first is many consumers will be able to pay down that debt in a matter of weeks or months, which provides a surge of satisfaction and a tangible measure of progress. It’s that zing of success that helps propel many people on to the next debt, often providing an important boost of momentum at a time when you may start running out of debt-repayment energy.

On the other hand, depending on the size of your debts and their associated interest rates, the snowball method can be significantly costlier thanks to the interest fees from your higher-interest debts. Additionally, since those interest fees eat up a portion (if not all) of your minimum payment, paying off all of your debt can take longer using the snowball method.

Weathering the Debt Storm

In the end, the choice of which method of debt repayment is best for you will depend on only you. If you know you can maintain a payment plan no matter how boring it gets, the avalanche method is the obvious choice, as it will save you money and, often, time. On the other hand, if you get more satisfaction out of a paid off account than you do from saving on interest fees, then the snowball method may be the best choice.

Of course, there’s nothing that says you have to choose one debt repayment method or the other. The most effective way to pay off your debt could use a combination of the two methods — or some other plan entirely. What works for one person won’t necessarily work for another, so you’ll need to look at your own situation to determine the best method.

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