Debt Payoff Calculator: Avalanche vs Snowball

Debt avalanche vs snowball: which saves more?

If you owe money on several credit cards and loans, the two best-known payoff strategies are the debt avalanche and the debt snowball. Both work, and both beat paying only the minimums by a wide margin. They differ in which debt you attack first, and that choice pits saving money against staying motivated.

This section compares them on the numbers, looks at what research on real borrowers found, and ends with a step-by-step plan you can start this month.

How do the avalanche and snowball methods work?

Both methods follow the same routine:

1. List every debt with its balance, interest rate (APR) and minimum payment.
2. Decide on a fixed monthly budget for debt: all the minimums plus an extra amount.
3. Pay the minimum on every debt.
4. Put all the extra money toward one target debt.
5. When the target is paid off, roll its payment into the next target, and repeat.

The only difference is the order of the targets:

• Avalanche: highest interest rate first.
• Snowball: smallest balance first.

The math: avalanche always wins on interest

Every extra dollar you pay cancels future interest on the debt you pay it toward. Sending that dollar to the highest-rate debt cancels the most interest, so the avalanche always costs the same or less in total interest than the snowball.

The difference is often smaller than people expect. Take four debts totaling $23,200:

• a $4,200 card at 24.99%;
• a $1,500 store card at 19.99%;
• an $11,000 car loan at 7.49%;
• a $6,500 personal loan at 12.9%.

Pay the $701 of combined minimums plus $250 a month extra:

Both methods cut the payoff time in half and save more than $3,200. The avalanche saves another $81, but the snowball delivers its first win seven months sooner.

The gap grows when your highest-rate debt is also large, and when rates differ widely between debts. Run your own debts through the debt payoff calculator to see your gap in dollars.

The research: motivation matters

If the avalanche is cheaper, why do so many people choose the snowball? Because a plan only works if you stick with it. Studies of real borrowers have found that motivation plays a large role:

• Closing accounts predicts success. A study published in the Journal of Marketing Research (Gal and McShane, 2012) analyzed consumers in a debt settlement program. People who fully paid off individual accounts were more likely to eliminate their overall debt, regardless of the dollar amounts involved. Small, complete victories seemed to keep people going.
• Focus beats spreading. Researchers including Remi Trudel reported in the Harvard Business Review (2016) on experiments showing that concentrating repayments on one account at a time made people feel more progress and stay more motivated than spreading payments across all their debts.

In short, the best method is the one you’ll finish. For some people that means the certainty of saving the most. For others it means the quick wins of watching debts disappear.

Which method should you choose?

Choose the avalanche if:

• your highest-rate debt is large, such as a big credit card balance at 25%+;
• your interest rates vary a lot;
• you’re motivated by the total dollars saved, and you’ll stay the course even if the first payoff takes a year.

Choose the snowball if:

• you have several small balances you can clear within a few months;
• you’ve started and abandoned payoff plans before;
• your rates are fairly similar, so the snowball costs little extra.

Or use a hybrid. Knock out one or two tiny balances first for momentum, then switch to avalanche order for the rest. Many people find this the most practical approach.

What matters more than the method

• The size of the extra payment. In the example above, going from $0 to $250 extra saves about $3,200. Switching methods changes the result by less than $100.
• Keeping payments fixed. Card minimums shrink as balances fall. If you let your payment shrink with them, payoff drags on for decades. See how much this costs with the credit card payoff calculator.
• Rolling over freed-up payments. Even with no extra money, rolling each paid-off debt’s minimum into the next target shortened the example payoff from 58 to 42 months.
• Lowering your rates. A 0% balance transfer or a lower-rate consolidation loan reduces the interest on every remaining dollar. Compare options with the debt consolidation calculator.
• Not adding new debt. A payoff plan can’t outrun new charges.

Your step-by-step plan

1. Gather your statements and write down every debt’s balance, APR and minimum payment.
2. Choose your monthly total. Look at your budget and commit to a fixed number: minimums plus whatever extra you can sustain.
3. Pick your order: avalanche, snowball or hybrid.
4. Automate the minimums on every account so you never pay a late fee or penalty APR.
5. Send the extra to your target each month, ideally right after payday.
6. Roll over each paid-off payment to the next target instead of spending it.
7. Put windfalls to work. Tax refunds, bonuses and side income go straight to the target.
8. Review every three months. Update balances, and celebrate each account you close.

If you can’t cover even the minimums, a nonprofit credit counseling agency can review your options, including a debt management plan that may lower your interest rates. Be cautious with companies that charge large upfront fees to settle debts.

Sources:

• Gal, D. & McShane, B. (2012), “Can Small Victories Help Win the War? Evidence from Consumer Debt Management,” Journal of Marketing Research.
• Trudel, R. (2016), “Research: The Best Strategy for Paying Off Credit Card Debt,” Harvard Business Review.
• FTC: How to get out of debt
• CFPB consumer tools