Many Americans live with debt, whether from credit cards, student loans or auto financing, and one of the first steps to financial soundness is managing that debt.

According to the Federal Reserve of New York‡, credit card delinquency rates rose slightly to 9.1% this year, demonstrating that more people are not able to make credit card payments. Paying off or minimizing credit balances can be approached from a variety of angles, but which one is right for you?

Debt payoff: How to do it

Debt can pile up faster than snow in a blizzard — according to Experian‡, as of the third quarter of 2023, the average American held $104,215 in debt. This number might seem overwhelming, but, remember, some consumers carry more or less than this amount.

The snowball and avalanche debt strategies are two ways of addressing debt. The snowball strategy involves prioritizing the smallest debt balances, offering quick psychological wins that fuel motivation. Conversely, the avalanche approach focuses on high-interest debts first, aiming to minimize the overall interest paid, though it might not provide the same immediate sense of progress. Both strategies have unique advantages and disadvantages, so carefully considering your personal situation and financial goals is vital in choosing the right path for managing debt effectively.

Below, compare and contrast two popular debt strategies to find which one may best fit your financial goals.

Snowball debt strategy: Smallest first

The snowball debt payoff strategy starts with paying the minimum amount on all your bills, while also putting as many dollars as you can toward the smallest debt balance each month. This method builds momentum by clearing out your smallest debts first, giving you a sense of accomplishment with each paid-off balance, which can be a significant motivator for many people.

As you eliminate these smaller debts, the money that was allocated to them can then be redirected toward the next smallest debt, creating an ever-growing “snowball” effect that helps you tackle debt more aggressively over time.

Critics of this approach may point out that it doesn’t address high-interest debt immediately, potentially costing more in interest overall — yet the boost in morale from clearing out smaller debts outweighs this disadvantage for some people. With each debt cleared, confidence grows, and financial discipline is reinforced, leading to long-term success in debt reduction.

Summary: Pay the smallest debt amount first, and then once it’s paid off, repeat the process with the next smallest debt balance.

Pros and cons of the snowball approach

  • Pro: It’s easy to follow this debt payoff strategy, which helps encourage continued progress and debt payment.
  • Pro: Quick wins for clearing out some debt can boost your confidence.
  • 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.

Avalanche debt strategy: Highest interest first

The avalanche debt strategy begins with paying the minimum required on all your bills but then prioritizes putting any additional funds toward the debt with the highest interest rate. This method effectively reduces the total amount of interest paid over time, as you’ll be minimizing the impact of high-interest charges by eliminating these debts first.

While this may seem daunting because it often involves tackling large balances, the long-term savings on interest can be substantial. Unlike the snowball method, which offers immediate satisfaction by quickly eliminating smaller debts, the avalanche strategy requires patience and perseverance, as the visible progress might be slower. However, once a high-interest debt is paid off, the relief and financial freedom gained can be a significant motivator.

Summary: Once the debt balance with the highest interest rate is paid off, start paying more on the next highest interest rate debt.

Pros and cons of the avalanche approach

  • Pro: By paying high interest debt first, you can save money by not letting interest accumulate.
  • Con: Because you deal with the highest interest rate debt first, you may be paying your largest balance debt, which can take a little longer to completely payoff. If you need the quick win of a payoff to motivate you, this strategy may not be the right fit.

Choosing a debt strategy

Choosing the right strategy will depend on the amount of debt you have, as well as what it takes to keep you motivated to stick with the plan. Whichever debt strategy you decide, stay focused to achieve your debt payoff goals.

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