What is the best way to pay off debts?

• Snowball and avalanche tactics are two popular debt repayment strategies.
• The snowball method treats the lowest balances first, and delivers small, instant gains.
• The avalanche method prioritizes higher interest debt, which lowers your costs in the long run.
• Read more stories from Personal Finance Insider.

Paying off multiple debts can be challenging. Having a strategy – and sticking to it – is key to making this happen.

Two common methods you can think of are the snowball method and the avalanche method. Each offers a framework for effectively and efficiently handling multiple debts. But the types of debt they prioritize vary. Here’s what you need to know about them and how to decide what’s best for your financial situation.

Debt Accumulation vs. Debt Avalanche: At a Glance

Snowball and avalanche debt repayment techniques can help you reduce and eventually get rid of your debt. It’s a little different, however, and depending on your circumstances, one method may be faster or more affordable than the other.

• Snowball method: With this strategy, you focus first on paying off your smallest debt. After that, you will incur the next smaller and so on until all your debts are paid.
• Avalanche method: This approach prioritizes higher interest debt first. Once that is paid off, you have to focus on the debt with the next highest rate.
  

What is the snowball method for debt?

The debt snowball method prioritizes lower outstanding debt. You’ll make the minimum payments on all of your debts and direct any additional money into that smaller debt first. Once you pay that off, you then focus on the next smallest debt (using the money you freed up from paying off the previous balance) and repeat the cycle until all the debts are paid off. This is said to mimic a snowball, which gets bigger and gains momentum as it rolls down a hill.

Says Lauren Anastasio, Certified Financial Planner^TM and Director of Financial Advisory at Stash. “By making minimal payments on all of your other debts and putting all of your extra cash toward the smallest balance commitment first, you’ll pay off your entire loans or cards faster, reducing the total number of bills you have to pay each month.”

Although this is usually more expensive than the avalanche approach — which treats higher-interest debt first — the snowball method provides a potential “behavioral” stimulus, according to David W. Barnett, owner of Grand Arbor Advisors.

“Personal finance includes both math and behavior,” Barnett says. “The snowball method, although it may not be computationally efficient, can have great behavioral value in that there is a strong sense of reward when the debt is paid in full and the number of outstanding debts is reduced.”

In general, the snowball method is best if you want to reduce the number of debt payments you make each month or need a little extra incentive to pay off your debt.

Bobbi Rebell, CFP . says^® Professional and personal finance expert at Tally, which provides a financial app that helps you organize and pay off your credit cards. “If you need those quick wins to motivate you to make progress, the debt snowball is the way to go. It won’t save you cost since you don’t pay the highest interest rate first, but it can help bring about changes in behavior to keep you steady and maintain momentum” .

Pros and cons of snow debt

An example of debt repayment in the snowball way

Let’s say you have a personal loan of $4,500, a credit card balance of $8,000, and a car loan of $20,000. With the snowball method, you can make minimal payments on your credit card and car loan while putting any extra money you have into your personal loan.

Once you pay off the personal loan, you’ll start focusing on your credit card and then, finally, the car loan.

What is the method of debt avalanche?

With the avalanche method, you can pay off your debt based on the interest rate, focusing your extra money on the higher interest debt first. When that debt is paid off, you move down the ladder to the debt with the next highest rate, and so on.

“You’re making minimal payments on everything, and throwing as much as you can toward debt with the highest interest rate,” Rebel says. “Once the debt is paid off at the highest interest rate, roll that payment toward the next debt with the highest interest rate. Repeat until all of your debts are paid. Like an avalanche, there is nothing stopping it once the momentum starts.”

The goal of this strategy is to prioritize the most expensive balances and reduce total interest costs.

“From a purely mathematical point of view, the avalanche method will always result in the largest amount of debt per dollar, with the most expensive debt being eliminated first,” Barnett says. “The intent of this method is to get rid of your debt with the highest interest rate first in order to save money.”

This approach is best if you are looking to save as much money as possible, but it has some drawbacks. First, it can be frustrating not to achieve results quickly. This also means that you will need to continue dealing with many debts for a longer period.

says Thomas Racca, Director at

Personal Finance Management

Team at Navy Federal Credit Union. “This method can be frustrating because it can take longer to reduce the various avenues of debt you have, but it will pay off the debt as quickly as possible by prioritizing higher debt amounts first.”

The pros and cons of a debt avalanche

An example of debt repayment by avalanche method

Here’s what Avalanche’s way of working would look like if you had three debts: $3,000 on a credit card with a 15% interest rate, $8,000 on a personal loan at a 9% rate, and $25,000 on a car loan at a 6% rate.

In this scenario, you’d be putting all the extra discretionary money toward the credit card while only making minimal payments on personal loans and auto loans. Once you pay off the credit card, you’ll focus on paying off the personal loan (which has the second highest interest rate) and the car loan after that.

Choose a strategy and stick to it

If you’re having trouble paying your debts, the snowball and avalanche strategy can help. The key is choosing and prioritizing religion, according to Anastasio.

“The last thing you want to do is spread your effort by paying a little extra on all of your bills,” Anastasio says. “If you have multiple credit card balances, loans or other debts that you want to pay off, pick one debt, stick to the minimum payment on all other debts, and put every extra dollar you have to pay off in full. This is the quickest way to eliminate the number of bills you have to pay. “.