The difference between debt snowball and debt avalanche method

The difference between debt snowball and debt avalanche method

If you are suffering because of credit card debt related issues, then you must consider coming out of the situation as soon as possible. It is commonly considered that debt can be eliminated only by consumer credit counseling or debt consolidation or settlement. However, there are other debt elimination methods that you should try first because they are free and easy. Out of these the two most common are the debt snowball and the avalanche method.

What is debt snowball method?

In most cases it is said that you must pay off the highest interest rate debts first. However, as per this method you are to focus more on paying off your low interest rate debts first so that you can generate some momentum. The advantage of starting with the debt that has the lowest rate of interest is that it will be paid off quickly. The money that you were paying towards it can be used to pay the debt that is the next lowest interest rate debt on your list. As you can manage to pay the debts very fast, you feel motivated. Following this method gives you quick wins that keep you motivated towards the goal of paying off your debts. You may loose interest if you do not see results even after you have paid a lot towards the debt with the maximum interest rate and this may demotivate you to such an extent that you stop making all efforts towards debt elimination.

What is the debt avalanche method?

Under this method you are to pay towards the debt with the highest rate of interest. The credit card debt that has the highest rate of interest is the one that is targeted. You pay the minimum payments for all debts but pay more than the minimum towards the debt that has the highest rate of interest. After this debt is paid off you are to focus on the next debt with the highest interest rate. Under this method you are paying a debt that has a high rate of interest so the amount that you pay goes chiefly towards paying the interest with little contributions towards the principal. Thus, the results come much later and the level of motivation is very low.

Which method you opt for depends completely on your debt scenario. If you have debts that are more or less of the same interest rate, then you should opt for the snowball method. On the other hand if you have high interest rate debts as well as low interest rate debts, then you should consider the debt avalanche method.