Debt Relief Experts
The debt snowball method pays off your smallest debts first to build motivation, while the debt avalanche method targets highest-interest debts first to save money. Your choice between these two debt repayment strategies affects how quickly you’ll become debt-free and how much interest you’ll pay. Compare how these different debt repayment strategies work to decide which matches both your financial needs and how you prefer to tackle goals.
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How Does the Debt Snowball Method Work?
The debt snowball method, popularized by financial author Dave Ramsey, focuses on paying off your smallest debts first, regardless of interest rates. This strategy builds momentum through quick wins, helping you stay motivated throughout your debt repayment journey.
To implement the debt snowball method:
- List all your debts from smallest to largest balance
- Make minimum payments on all debts
- Put any extra money toward your smallest debt
- Once the smallest debt is paid, add that payment to the next smallest debt
How Does the Debt Avalanche Method Work?
The debt avalanche method takes a mathematical approach by targeting debts with the highest interest rates first. This strategy minimizes the total interest you’ll pay and can help you become debt-free faster.
To implement the debt avalanche method:
- List all debts from highest to lowest interest rate
- Make minimum payments on all debts
- Put extra money toward the highest-interest debt
- Once that’s paid, move to the next highest-interest debt
Comparing Debt Snowball vs Debt Avalanche: An Example
Let’s look at a practical example to understand how each method works in practice.
Consider this common debt scenario:
| Debt Type | Balance | Interest Rate | Minimum Payment |
|---|---|---|---|
| Store Credit | $1,000 | 29.9% | $30 |
| Line of Credit | $8,000 | 6.5% | $200 |
| Visa | $12,000 | 17.9% | $360 |
| Mastercard | $15,000 | 19.9% | $450 |
Here’s how you would prioritize these debts under each method:
| Priority | Snowball Method (By Balance) | Avalanche Method (By Interest Rate) |
|---|---|---|
| 1st | Store Credit ($1,000) | Store Credit (29.9%) |
| 2nd | Line of Credit ($8,000) | Mastercard (19.9%) |
| 3rd | Visa ($12,000) | Visa (17.9%) |
| 4th | Mastercard ($15,000) | Line of Credit (6.5%) |
With an extra $300 monthly payment on top of minimums:
- Snowball Method: Debt-free in 35 months, paying $9,978 in interest
- Avalanche Method: Debt-free in 34 months, paying $8,637 in interest
The avalanche method saves $1,341 in interest and one month of payments in this scenario.
Both repayment methods work with all types of debt – whether you have credit cards, a car loan, student loan, or personal loan. Your debt payments will remain the same; only the order changes based on which repayment method you choose.
Try our debt payoff calculator to compare how repaying debts on your own will compare with different debt relief alternatives.
Enter Your Total Unsecured Debt
| Options To Eliminate Your Debt |
Monthly Payment (approximate) Over 5 Years |
Total Cost Over 5 Years |
Total Savings Over 5 Years |
|---|---|---|---|
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Consumer Proposal Pay Less than Principal Debt Amount |
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Credit Counselling No Principal Reduction |
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Debt Consolidation Added Interest Costs |
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Repay Debt on Your Own Added Interest Costs |
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Got Questions?
Does the Debt Snowball Method Really Work?
The effectiveness of the debt snowball method depends on your personal motivation to get out of debt. Let’s examine what works and what doesn’t.
Advantages of the Snowball Method
The snowball method excels in several key areas. Here is what we like:
- Creates psychological wins through quick debt elimination
- Helps maintain motivation through visible progress
- It simplifies the debt repayment process as it’s easy to know which debts to pay off first
- Works well for people who need early success to stay committed
- Provides clear milestones to celebrate
- It makes it easier to track financial goals as you eliminate smaller debts one by one
Disadvantages of the Snowball Method
However, there are significant drawbacks to the snowball method:
- Ignoring interest rates can cost you thousands in extra interest
- Interest payments continue to accumulate on larger balances while focusing on smaller debts
- It will take longer to become debt-free
- It is not optimal for those with significant high-interest debt
For example, using our previous scenario, paying by interest rate (avalanche) instead of balance size (snowball) could save you over $1,300 in interest charges and help you become debt-free one month sooner.
The key advantage of the debt avalanche vs debt snowball is that you pay your debt off fast.
Which Repayment Strategy is Right For You?
How to pay off debt successfully depends on choosing a strategy that matches your personality and financial situation.
Choose the Snowball Method if:
- You’re motivated by quick wins
- Your debts are relatively small
- Interest rate differences between debts are minimal
- You’ve struggled to stick with debt repayment plans before
Choose the Avalanche Method if:
- You have significant high-interest debt
- You’re motivated by saving money
- You can maintain focus without quick wins
- Your largest debts also have the highest interest rates
Regardless of which method you choose, to be successful, it’s best to create a realistic budget and allocate every dollar you can to debt repayment. Track your progress monthly and celebrate all milestones. Avoid taking on new debt and stop using your credit cards until the balances are paid in full.
Frequently Asked Questions About Debt Repayment
Is it good to pay the minimum on credit cards? You should always pay at least the minimum to avoid debt collection calls. However, paying only the minimum on your credit cards is costly and can trap you in debt for years – for example, a $5,000 credit card balance at 19.99% interest will take 27 years to pay off making only minimum payments.
What happens if you don’t pay your debt? Unpaid debts will damage your credit score and can lead to collection actions, wage garnishment, and legal action against you.
What is debt stacking? Debt stacking is another name for the debt avalanche method, where you pay off your highest interest rate debts first while making minimum payments on other debts to save the most money in interest charges.
Is it better to pay off debt with a high-interest or low balance? Mathematically, paying off high-interest debt first (avalanche method) will save you the most money, but paying off low balances first (snowball method) can provide psychological wins that help some people stay motivated.
Can I use my line of credit to pay off credit cards? Transferring high-interest credit card debt to a lower-interest line of credit can save you money, but only if you stop using the credit cards and commit to paying off the line of credit balance.
Should I close my credit cards after paying them off? Keep your oldest credit card account open with a zero balance to maintain your credit history length, but consider closing newer cards to avoid the temptation of new debt.
What if I miss a payment in my debt repayment plan? If you miss a payment, contact your creditors immediately to explain the situation and get back on track as soon as possible; one missed payment can affect your credit score for up to six years in Canada.
Can I use my RRSP to pay off debt? While you can withdraw from your RRSP to pay debt, it’s usually not recommended as you’ll pay withholding tax, lose the contribution room permanently, and sacrifice long-term retirement savings.
When is debt consolidation a good idea? Debt consolidation makes sense when you qualify for a lower interest rate than your current debts, can afford the monthly payments, and are committed to not taking on new credit card debt.
Should I consider a balance transfer while using these methods? A balance transfer can help reduce interest charges while using either repayment method, but be careful to factor in any transfer fees and make sure you can pay off the balance before any promotional rate expires.
Signs You Need Debt Relief
Neither the snowball nor avalanche method will work if you’re struggling with overwhelming debt. Consider speaking with a Licensed Insolvency Trustee if:
- You can’t make more than minimum payments on your credit cards
- You’re falling behind on monthly bills
- Collection agencies are calling
- It will take more than 5 years to pay off your credit card and other unsecured debt
As debt advisory experts, a Licensed Insolvency Trustee can review additional debt relief options that might work better for your situation, including:
- Your eligibility for debt consolidation at a reasonable rate
- Repaying debt through a debt management plan with a credit counselling agency
- Settling debts for less than you owe through a consumer proposal
- Filing bankruptcy to eliminate problem debt
Contact Hoyes Michalos today for a free consultation to review all your debt relief options. We’ll help you understand which solution best fits your situation and guide you toward becoming debt-free.
