In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest rates—targeting the most expensive ones first—it means you end up paying less in interest.
The snowball method tackles your lowest balances first, offering small, more immediate wins. The avalanche method prioritizes higher-interest debts, reducing your long-term costs most. Read more stories from Personal Finance Insider.
In fact, researchers for the Harvard Business Review found that the opposite approach, known as the snowball method, actually proved to be the most effective strategy. Popularized by “The Total Money Makeover” author Dave Ramsey, the snowball method prioritizes your smallest debts first, regardless of interest rate.
What is the avalanche method? With the avalanche method, you pay off the balance with the highest APR first, then work your way through all your debt from highest to lowest APR. Some financial experts prefer this method because you end up paying less overall in interest.
With the "avalanche method," it may take longer to roll over to your next account but if you have larger balances with higher interest rates and you stick to the plan, it should save you in the long run.
Between the debt snowball and the debt avalanche methods, the debt avalanche method is the quicker of the two. That's because this method focuses on paying down the debt with the highest interest rate first, which in turn means that your debt will accumulate less interest fees as you pay off that card.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
Option 1: Pay off the highest-interest debt first
Best for: Minimizing the amount of interest you pay. There's a good reason to pay off your highest interest debt first — it's the debt that's charging you the most interest.
You may have heard carrying a balance is beneficial to your credit score, so wouldn't it be better to pay off your debt slowly? The answer in almost all cases is no. Paying off credit card debt as quickly as possible will save you money in interest but also help keep your credit in good shape.
Save Money on Interest
Then, pay off the credit card with the highest interest rate first by making high lump sum payments to that card each month. Once you pay off the credit card with the highest interest rate, move on to the card with the next highest interest rate.
Start By Paying Off Credit Card Debt
To start, it's important to understand how credit scoring models distinguish between the two broad types of credit: Installment accounts and revolving credit accounts. Installment accounts typically have a fixed loan amount and repayment schedule.
The two strategies diverge over which debt you single out first. In the debt avalanche method, you pay extra money toward the debt with the highest interest rate. With the debt snowball method, you pay down the smallest debt first and work your way up, regardless of the interest rate.
If you'd like to buy a home, carrying credit card debt doesn't have to keep you from fulfilling your dream. But paying down the debt will lower your debt-to-income ratio (DTI) and could strengthen your credit score. That, in turn, will help you qualify for a home loan and potentially score you a lower interest rate.
Ask for a raise at work or move to a higher-paying job, if you can. Get a side-hustle. Start to sell valuable things, like furniture or expensive jewelry, to cover the outstanding debt. Ask for assistance: Contact your lenders and creditors and ask about lowering your monthly payment, interest rate or both.
It's best to avoid using savings to pay off debt. Depleting savings puts you at risk for going back into debt if you need to use credit cards or loans to cover bills during a period of unexpected unemployment or a medical emergency.