Debt avalanche vs debt snowball

If you owe money on more than one card or loan, you have a choice to make every month: where does any extra money go? The debt avalanche and the debt snowball are two simple answers. One is built to save the most interest, the other to build momentum. Here is how each works, what the difference can look like in dollars and what researchers have found.

What the two methods have in common

Both methods follow the same basic routine. A 2019 CFPB blog post, now in the CFPB's archive, describes these steps for the snowball, and the avalanche changes only the order:

1. List every debt with its balance, interest rate and minimum payment.
2. Pay at least the minimum on every debt, every month.
3. Put any extra money toward one target debt.
4. When the target is paid off, add the payment you were making on it to the next target.

That last step is what makes both methods speed up over time. The money you were sending to a paid-off debt doesn't disappear back into your budget. It rolls into the next one.

The only difference is the order of the targets.

The debt avalanche: highest interest rate first

With the avalanche, your first target is the debt with the highest interest rate (APR, or annual percentage rate). Then you move to the next highest rate, and so on.

The CFPB's description of this approach is direct: "The goal is to pay off the highest interest rate debt as quickly as possible, because it's costing you the most." The upside is lower total interest. The downside, the CFPB notes, is that it may not feel like you're making progress.

The debt snowball: smallest balance first

With the snowball, your first target is the debt with the smallest balance, whatever its interest rate. Once it is gone, you move to the next smallest.

The CFPB says the benefit is that you see progress quickly. The trade-off is that "you may end up paying more in the long run," because a high-rate debt can sit in the background collecting interest while you clear smaller ones.

A worked example

Here is a hypothetical example, using round numbers, to show how the order changes the cost. Suppose you have two credit card balances and can put $400 a month toward debt in total:

In the first month, Card A charges about $10 in interest ($1,000 × 12% ÷ 12). Card B charges about $100 ($5,000 × 24% ÷ 12). That gap is the whole argument for the avalanche: each dollar on Card B stops more interest than a dollar on Card A.

After paying both minimums ($125), you have $275 extra each month.

• Snowball: the extra $275 goes to Card A, the smaller balance. Card A is paid off in month 4, then the full $400 goes to Card B.
• Avalanche: the extra $275 goes to Card B, the higher rate. Card B is paid off in month 16, then everything goes to Card A.

We calculated both plans month by month, assuming interest is charged each month at the APR divided by 12, the minimums stay fixed, and no new charges are added. Here is the result:

In this example the avalanche saves about $150 in interest, and both plans finish in the same month. The snowball, though, gives you a fully paid-off card a full year sooner.

Your numbers will be different. The gap grows when the high-rate debt is also large and the rates are far apart. It shrinks when the rates are close together. Your card agreements may calculate interest and minimum payments differently from this simple model, so treat it as an illustration, not a forecast.

What research says about the snowball

If the avalanche is cheaper, why do so many people use the snowball? Researchers have looked at that question.

David Gal and Blake McShane published a study in the Journal of Marketing Research in 2012 using data from nearly 6,000 clients of a debt settlement firm. As summarized by Kellogg Insight, they found that the number of accounts people closed predicted whether they completed the program better than the dollar amount they had paid off. Clients who closed more accounts were more likely to finish, even when the total paid was the same.

Kellogg Insight's summary adds caveats: the number of accounts and the dollar amount paid were highly correlated and hard to separate, and focusing on small accounts first makes most sense when the interest rate difference between small and large balances is modest. Note also that this was a study of people in a debt settlement program, which may not reflect everyone.

Other researchers have reached related conclusions. In a December 2016 Harvard Business Review article titled "Research: The Best Strategy for Paying Off Credit Card Debt," Remi Trudel of Boston University's Questrom School summarized his research under the one-line takeaway "Pay off the smallest debt first."

How to choose

The CFPB frames the choice around what matters most to you. If saving the most money is your priority, the highest-interest-rate method fits. If quick progress keeps you going, the snowball may be a better match.

Some questions that can help:

• How far apart are your rates? If they are close, the avalanche saves little and the snowball's quick wins cost little.
• Is your highest-rate debt also your biggest? Then the avalanche may take a long time to show a paid-off account.
• Have you started plans before and stopped? If so, early wins may be worth some extra interest.
• Will you keep adding new charges? Neither method works well if balances keep growing. A budget that covers your spending matters as much as the payoff order.

You can also combine them: clear one tiny balance for a quick win, then switch to the avalanche.

If your debts feel unmanageable, a nonprofit credit counselor can help you build a budget and review options. The CFPB explains what credit counseling is and lists red flags, such as an organization that won't send free information or pushes a debt management plan before reviewing your finances.

How SpendySaver helps

The debt payoff planner in Net worth and goals supports both the avalanche and snowball methods, so you can map out a payoff order for your own debts. The same section also has a loan simulator and savings goals, so you can track progress as balances fall. SpendySaver is read-only and never moves money for you.