Paying off smaller balances first (debt snowball method) may give you motivation to keep going. Paying off higher-interest debt first (debt avalanche method) may save you more money. Paying off debt may be good for your financial and mental health.
The Best Ways to Pay Off Debt
Debt consolidation, the debt snowball method and the debt avalanche method are some of the best ways to tackle debt, especially if you have high-interest credit card balances.
Pros and cons of the snowball approach
Con: Waiting to pay larger debt balances — which may have compounding interest rates — could result in larger interest payments. Larger interest payments could then extend the length of time you'll be paying your debt off and increase your overall payoff amount.
Debt Snowball. Where the debt avalanche takes a mathematical approach, the debt snowball method works to keep you motivated. With the debt snowball method, you start by paying off your lowest balance before moving on to your second lowest balance. You'll pay off your highest balance, regardless of interest, at the end.
Prioritizing debt by interest rate.
The avalanche method can save you both money and time. Chipping away at your priciest debts first reduces what you'll pay in interest in the long run. In turn, you can use the savings to help pay down what you owe and speed up the repayment process.
The debt snowball method is a debt-reduction strategy where you pay off debt in order of smallest balance to largest balance, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Pay off your most expensive loan first.
Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the “avalanche method” of paying down debt.
With the debt snowball method, you pay your smallest debt in full first, then roll the amount that was going toward that bill into paying off your next-smallest one.
Debt avalanche: Focus on paying down the debt with the highest interest rate first (while paying minimums on the others), then move on to the account with the next highest rate and so on. This might help you get out of debt faster and save you money over the long run by wiping out the costliest debt first.
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
If you're motivated by saving as much money as possible down to the last penny, you'll probably prefer the "avalanche" method. On the other hand, if getting a quick win right off the bat encourages you to keep moving forward, then the "snowball" method will likely motivate you the most.
If you only make the minimum payment each month, which is typically around 1% of the balance plus interest, here's what you can expect: Time to pay off: Approximately 421 months.
1% of the balance plus interest: It would take 29.5 years or 354 months to pay off $10,000 in credit card debt making only minimum payments. You would pay a total of $19,332.21 in interest over that period.
May not save maximum interest: The debt snowball method is not necessarily the best choice for saving money on interest. Because you're prioritizing balances over interest rates and only making minimum payments on debts that are low on the list, you could end up paying considerably more in interest over time.
The avalanche method focuses your repayment efforts on high-interest debt, while the snowball method targets your smallest debts first. Debt consolidation is another option to consider. Whichever repayment strategy you choose, it's important to keep up with your other financial goals while working to become debt-free.
The advantage of the debt avalanche method is that it reduces the total interest you pay in the long term. Interest adds to your debts because most lenders use compound interest. The accrual rate depends on the frequency of compounding—the higher the number of compounding periods, the greater the compound interest.