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.
Paying off or minimizing credit balances can be approached from a variety of angles, but which one is right for you?
Debt payoff approaches
Debt can pile up faster than snow in a blizzard — according to Value Penguin‡, the average amount of debt for an American adult (excluding mortgage) is $23,325.
The snowball and avalanche debt strategies are two ways of addressing debt. Compare and contrast two popular debt strategies to find which one best fits your financial goals.
Snowball debt strategy
The snowball debt payoff strategy starts with paying the minimum amount on all your bills, while also putting as many dollars are you can toward the smallest debt balance each month.
Once the smallest balance is 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.
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.
Avalanche debt strategy
With the avalanche debt strategy, you pay the minimum due on all your bills, and pay as much as you can on the balance with the highest interest rate.
Once the balance with the highest interest rate is paid off, start paying more on the next highlight 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.