Snowball vs. Avalanche Debt Reduction Strategies

 When debt gets out of control, it can be a serious threat to your financial security. The money that goes to paying your debt can be used for building your emergency fund or achieving your financial goals instead. With a goal to reduce debt, paying off your debt requires commitment and consistency. There are two common debt reduction strategies to help you stay committed to paying off your debt. Let's explore the differences in the snowball vs avalanche debt reduction methods.

Snowball Method

How it works: With a snowball method, you focus on paying off your smallest debt first while you make minimum payments on your other debts. Once the smallest debt is paid off, you work towards paying off the next smallest debt and so on, creating a snowball effect as you gain momentum.

Pros: If you have multiple large debts you want to pay off, following a snowball method can be easier to manage since you only focus on one debt at a time. It can also provide a sense of accomplishment and motivation to continue working towards reducing your debts.

Cons: Since you’re paying off the smallest debt, you’re not prioritizing debts based on interest rates. You may end up paying more interest over time. The total cost of paying debts may be slightly higher since higher interest rates are not prioritized.

Avalanche Method

How it works: The avalanche method works by paying off the largest debt or highest interest rate first while you make minimum payments on lower debts or interest rate rates. Once the highest debt is paid, you move to the next highest and so on, creating an avalanche effect.

Pros: By tackling the highest debt, you minimize the total amount of interest paid, saving you more money in the long run. Most financial experts claim that the avalanche method is mathematically optimized for reducing the overall cost of debt repayment.

Cons: If you’re on a tight budget, paying off the largest debt or higher interest rate may be a challenge and take longer to pay off, which could be discouraging for some.

Which method is better?

If you’re eager to reduce your debts in a faster manner, following a snowball method may be suitable for you. On the other hand, if you’re looking to minimize interest costs and maximize overall savings, even if it means a longer timeline to pay off your debts, the avalanche method may be the best method to follow.

Conclusion

Ultimately, the best approach depends on your financial situation and goals. The snowball and avalanche method are essential in improving your financial well-being and achieving long-term financial stability. In addition to these debt strategies, CCCU recommends utilizing free financial resources for managing debt to help you make informed decisions.