Debt Snowball vs Debt Avalanche

You’ve heard of Debt Snowball and/or Debt Avalanche. You might be wondering what’s the difference between them. You might also be wondering if one is better than the other. Let’s compare Debt Snowball vs Debt Avalanche.

DEBT SNOWBALL

When you use the Debt Snowball, you list all of your starting with the lowest balance of each debt and proceed down to the highest balance. For example, let’s say you have five debts: debt one is a Visa with a $500 balance, debt two is a Sears with a balance of $250, debt three is a car loan with a balance of $13,000, debt four is a MasterCard with a balance of $1,000, and debt 5 is a Discover with a balance of $650. You would list your debts from smallest to largest:

  1. Sears      $250
  2. Visa        $500
  3. Discover $650
  4. MC         $1,000
  5. Car         $13,000

Your next step is start paying the most that you can on the Sears balance and pay the minimum balance on the remaining four debts. Let’s say you have $650 allocated for debt repayment. The minimum payment on each of your debts is:

  1. Sears      $10
  2. Visa        $10
  3. Discover $20
  4. MC         $30
  5. Car         $383

Take the $650 you have and subtract the minimum payment from debts 2-4:

  • Visa        $650 – 10 = $640
  • Discover $640 – 20 = $620
  • MC         $620 – 30 = $590.00
  • Car         $590 – 383= $207

Applying the payment amounts to your debts would look like this:

  • Sears        $650 – 207 = $443
  • Visa          $443 – 10 = $433
  • Discover   $433 – 20 = $413
  • MC           $413 – 30 = $383
  • Car           $383 – 383= 0

This means you can pay $153.78 towards your Sears card.

  • Sears: $250 – 207 =  $45

Next month, you’ll be able to payoff your Sears card. You’ll still pay the minimum on the other debt.

  • Sears        $650 – 45 = $443
  • Visa          $443 – 10 = $433
  • Discover   $433 – 20 = $413
  • MC           $413 – 30 = $383
  • Car           $383 – 383= 0

You’ll continue doing this until you payoff the Visa. Then, you’ll take the amount you were paying on the Visa and add it to the amount you were paying on the Discover. Once the Discover is paid off, you’ll add the amount you were paying on it to the amount on the MC. Once that’s paid off, you add that amount to car payment until it’s paid off.

The biggest advantage to the Debt Snowball is that you see small debt disappearing. This gives you hope and a sense of victory. The biggest drawback is that the small debt might not be the debt wit the highest interest rate. This means you’ll be paying more money in interest on the debt.

DEBT AVALANCHE

When you use the Debt Avalanche, you list all of your starting with the lowest interest rate of each debt and proceed down to the highest interest rate. Using our prior example, we would look at each of debts and list them from highest interest rate to lowest interest rate.

  • Car             3.89%
  • MC           17.99%
  • Discover   23.99%
  • Visa          24.74%
  • Sears        26.49%

This looks very different then our Debt Snowball. Our car loan has the lowest interest rate, so we would attack that debt first. Remember from our first example, our car loan payment amount was $383 and we had $207 to pay on our debt based our $650 debt repayment amount. Therefore, our new car payment would be $590. Below is a chart showing that you would payoff your car loan in 24 months and not 36 months.

Loan Summary
Loan Amount: $13,000.00 Number of Payments: 24
Annual Interest Rate: 3.8900% Periodic Payment: $383.00
Loan Date: 09/01/2017 1st Payment Due: 10/01/2017
Payment Frequency: Monthly Last Payment Due: 09/01/2019
Total Interest Due: $525.38 Total All Payments: $13,525.38
Payment Schedule
#/Year Date Payment Interest Principal Balance
Loan: 09/01/2017 0.00 0.00 0.00 13,000.00
1:1 10/01/2017 383.00 42.14 340.86 12,659.14
2:1 11/01/2017 383.00 41.04 341.96 12,317.18
XPmt 207.00 0.00 207.00 12,110.18
3:1 12/01/2017 383.00 39.26 343.74 11,766.44
XPmt 207.00 0.00 207.00 11,559.44
2017 YTD: 1,563.00 122.44 1,440.56
Running Totals: 1,563.00 122.44 1,440.56
4:1 01/01/2018 383.00 37.47 345.53 11,213.91
XPmt 207.00 0.00 207.00 11,006.91
5:1 02/01/2018 383.00 35.68 347.32 10,659.59
XPmt 207.00 0.00 207.00 10,452.59
6:1 03/01/2018 383.00 33.88 349.12 10,103.47
XPmt 207.00 0.00 207.00 9,896.47
7:1 04/01/2018 383.00 32.08 350.92 9,545.55
XPmt 207.00 0.00 207.00 9,338.55
8:1 05/01/2018 383.00 30.27 352.73 8,985.82
XPmt 207.00 0.00 207.00 8,778.82
9:1 06/01/2018 383.00 28.46 354.54 8,424.28
XPmt 207.00 0.00 207.00 8,217.28
10:1 07/01/2018 383.00 26.64 356.36 7,860.92
XPmt 207.00 0.00 207.00 7,653.92
11:1 08/01/2018 383.00 24.81 358.19 7,295.73
XPmt 207.00 0.00 207.00 7,088.73
12:1 09/01/2018 383.00 22.98 360.02 6,728.71
XPmt 207.00 0.00 207.00 6,521.71
13:2 10/01/2018 383.00 21.14 361.86 6,159.85
XPmt 207.00 0.00 207.00 5,952.85
14:2 11/01/2018 383.00 19.30 363.70 5,589.15
XPmt 207.00 0.00 207.00 5,382.15
15:2 12/01/2018 383.00 17.45 365.55 5,016.60
XPmt 207.00 0.00 207.00 4,809.60
2018 YTD: 7,080.00 330.16 6,749.84
Running Totals: 8,643.00 452.60 8,190.40
16:2 01/01/2019 383.00 15.59 367.41 4,442.19
XPmt 207.00 0.00 207.00 4,235.19
17:2 02/01/2019 383.00 13.73 369.27 3,865.92
XPmt 207.00 0.00 207.00 3,658.92
18:2 03/01/2019 383.00 11.86 371.14 3,287.78
XPmt 207.00 0.00 207.00 3,080.78
19:2 04/01/2019 383.00 9.99 373.01 2,707.77
XPmt 207.00 0.00 207.00 2,500.77
20:2 05/01/2019 383.00 8.11 374.89 2,125.88
XPmt 207.00 0.00 207.00 1,918.88
21:2 06/01/2019 383.00 6.22 376.78 1,542.10
XPmt 207.00 0.00 207.00 1,335.10
22:2 07/01/2019 383.00 4.33 378.67 956.43
XPmt 207.00 0.00 207.00 749.43
23:2 08/01/2019 383.00 2.43 380.57 368.86
XPmt 207.00 0.00 207.00 161.86
24:2 09/01/2019 162.38 0.52 161.86 0.00
2019 YTD: 4,882.38 72.78 4,809.60
Running Totals: 13,525.38 525.38 13,000.00

You’ll continue doing this until you payoff the MC. Then, you’ll take the amount you were paying on the MC and add it to the amount you were paying on the Discover. Once the Discover is paid off, you’ll add the amount you were paying on it to the amount on the Visa. Once that’s paid off, you add that amount to Visa payment until it’s paid off. The biggest advantage to the Debt Avalanche is that you save money on interest. The drawback is that it might take you a little longer to see it paid off, so your sense of victory might not be as immediate.

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