Debt Snowball Vs. Debt Avalanche: The Best Way To Pay Off Credit Card Debt

If you’re in credit card debt, first things first. Take a deep breath. You are not alone.

According to the Consumer Financial Protection Bureau, Americans have about $1 trillion in credit card debt. Borrowers have paid $104 billion in interest in the past year alone.

In this article we’ll cover the two popular ways to tackle credit card debt–the debt snowball and the debt avalanche. They boil down to two schools of thought. One relies on psychology as a motivator (debt snowball) and the other focuses just on the numbers (debt avalanche). There are pros and cons to both approaches, as you’ll see.

To start, however, we must first look at the perils of making just the minimum payment on a credit card.

Credit Card Minimum Payments

Credit card issuers use different formulas to determine the monthly minimum payment. In general, the minimum payment will be around 1 – 3% of the outstanding balance. As a result, the minimum payment on $10,000 in credit card debt will be just a couple hundred dollars.

This relatively small payment is attractive to many. A recent study found that 29% of American credit card accounts regularly make payments at or near the minimum. This creates a big problem.

Making just the minimum payment on a credit card is expensive. A $10,000 balance at 18% interest with a 2% minimum payment generates a monthly minimum payment of just $200. Make just the minimum payment, however, and it will take more than 30 years and cost over $35,000 to pay off the debt, according to this Bankrate calculator.

We can do much better using either the debt snowball or avalanche methods.   

The Debt Snowball

With the debt snowball, you list all of your debts based on the outstanding balance. You make the minimum payment on each card. Then you put any additional money you have toward the card with the smallest balance. Importantly, you do not consider each card’s interest rate. Instead, you focus just on the outstanding balance.

The theory is that by focusing on the smallest balance first, you’ll pay it off quickly. This in turn will motivate you to continue paying off your debt. Once the smallest debt is paid off, you direct the money you were paying on that debt to the card with the next smallest balance. This process continues until all of your credit card debt is paid in full.

Depending on your personality, paying down a small amount of debt before you tackle larger bills can be a big boost. For people who are emotional about their finances, this can be a great strategy.

The Debt Avalanche

With the debt avalanche, the focus shifts from the smallest balance to the highest interest rate. All extra funds above the minimum payment go to the card with the highest interest rate. Once paid in full, money is then directed to the card with the next highest interest rate.

From a financial perspective, paying off your higher interest rate balance first is the most prudent course of action. Obviously, you should continue to make minimum payments on all credit cards while you do this, but you should prioritize getting your higher interest rate debt down to zero.

The result is that you get out of debt paying the least possible amount of interest. It may also mean, however, that it takes a long time to knock out that first debt.

Debt Snowball vs. Avalanche

It could be that your higher balance card also happens to be the one with the lower interest rate, to which we say, lucky you! In some cases, there might not be that much of a difference between the avalanche and snowball method. Use this free debt avalanche/snowball calculator to see if there is a big discrepancy between these payment strategies and decide which one is right for you.

If you’re drowning in high interest rates

If you’re committed to monthly payments but still drowning in credit card debt thanks to high interest rates, there are additional options. Both of these do not by any means erase debt, and also come with their own setbacks. They might, however, help you with high interest rates if either the snowball or avalanche method aren’t working fast enough.

Consolidate credit card debt

If the avalanche and snowball method have you spinning and still paying high interest rates on multiple cards, you can consolidate your credit card debt with a credit card consolidation loan or small personal loan.

This can be a great way to cover credit card debt. Your debt is consolidated into an unsecured personal loan that is then repayable in three to seven years. Although you will still have the same amount of overall debt, you likely won’t be paying exorbitant interest rates along the way.

Since all cases are different, use this calculator to see if a small personal loan is the right path for you. Another benefit of a small personal loan is that if you qualify, it can help boost your credit score.  

Balance transfer card

A balance transfer card offers you the possibility of 0% interest rates for a set amount of time, usually between six to 21 months.  You can transfer your high-interest credit card debt to this card, meaning that you’ll have a reprieve from interest rates and be more able to tackle your balance.

One caveat is that these cards usually require a high credit score. If you’ve been remiss about monthly payments or have damaged your credit, it might not be an available option.