Debt avalanche vs debt snowball: how each method works and what it costs

If you owe money on several cards or loans and have a fixed amount to put towards them each month, the order in which you clear them changes how much interest you pay overall. The two best-known orders are the debt avalanche (highest interest rate first) and the debt snowball (smallest balance first). This guide shows how each works, runs both through the same set of debts month by month, and sets out the trade-offs without picking a winner for you.

The two methods in one paragraph each

Debt avalanche. List your debts from the highest APR to the lowest. Pay the minimum on every debt, then send every remaining unit of your monthly budget to the debt at the top of the list. When it is cleared, move to the next-highest rate. The US Consumer Financial Protection Bureau describes this as the “highest interest rate method” and notes that paying off the debts that charge the most interest first saves money overall.

Debt snowball. List your debts from the smallest balance to the largest, ignoring the rate. Pay every minimum, put the rest of the budget on the smallest balance, and when it is gone roll that money on to the next-smallest. The CFPB notes that this method shows progress quickly, but that you may pay more in the long run because the larger or more expensive debts wait.

Rules both methods share

The methods differ only in the order of the list. Everything else is the same, and these shared rules are what make either method work:

• A constant monthly budget. You decide a total, for example 500 a month, and keep paying it until every debt is cleared.
• Every minimum, every month. Minimums on all debts are paid first, so no account falls behind.
• Freed minimums roll over. When a debt is cleared, its minimum does not disappear from the budget. Because the total stays the same, the money that used to cover that minimum automatically joins the extra payment on the next target. This roll-over is the “snowball” effect, and it applies to the avalanche too.
• No new borrowing on the cleared accounts. Both methods assume balances only go down. New spending on a card resets part of the plan.

To see what share of your budget currently goes on interest, the percentage calculator is a quick check: divide this month’s interest charges by your monthly payment total.

Worked example: two debts, 500 a month

Take two debts and a budget of 500 a month:

• Debt A: balance 6,000 at 24% APR, minimum payment 150.
• Debt B: balance 1,500 at 6% APR, minimum payment 50.

Each month, interest is calculated as the balance multiplied by the APR divided by 12, rounded to the cent. Minimums are paid, and the remaining budget goes to the target. Here the avalanche targets A (the higher rate) and the snowball targets B (the smaller balance).

Continuing the same rules every month until both balances reach zero gives these results:

In this scenario the avalanche costs 275.50 less in interest. Both plans finish in month 18, but the avalanche needs only 146.87 in its last month instead of 422.37. The snowball, on the other hand, clears its first debt in month 5, eleven months before the avalanche clears anything.

Why the avalanche usually costs less

Every unit of extra payment stops a unit of balance from attracting interest. Directing it at a 24% debt stops 24% a year of interest; directing it at a 6% debt stops only 6%. With a constant budget, the avalanche therefore removes the most expensive money first at every step. In the example, the snowball spent its first five months reducing a debt that cost 7.50 a month in interest while the 24% balance barely moved, and debt A ended up generating 353.04 more interest as a result.

The size of the gap depends on the spread between rates and how long the plan lasts. If your debts all carry similar rates, the two methods give similar totals. If the smallest debt also has the highest rate, the two orders are identical and so are the results.

Why people still choose the snowball

A repayment plan only saves money if it is kept up for its whole length, and that is partly a question of motivation. The snowball produces visible wins early: an account closed, one fewer statement, one fewer due date. The CFPB frames the choice in exactly these terms: the highest-rate method suits people motivated by saving the most money, while the snowball suits people motivated by seeing progress quickly.

There are practical reasons as well. Clearing a small debt quickly reduces the number of payments to manage, which can lower the risk of a missed payment and the fees that come with it. Some people also use a hybrid: clear one very small balance first for a quick win, then switch to avalanche order. The arithmetic of any order can be checked the same way, by running the month-by-month rules above.

The minimum-payment trap

Both methods depend on paying more than the minimums. To see why, take debt A on its own and pay only its 150 minimum each month. At 24% APR it would take 82 months to clear, with 6,191.34 in interest, more than the original balance. Many card minimums are a percentage of the balance, so they fall as the balance falls, which stretches repayment out further still.

In the US, credit card statements are required to show how long it would take to pay off the balance making only minimum payments, and the monthly payment needed to clear it in three years if no further purchases are made. The CFPB explains that the three-year figure assumes no new spending on the card.

Other factors to weigh

• Variable rates. Card and loan APRs can be variable and change with a benchmark, as the CFPB explains. A debt that is second in avalanche order today can move to first if its rate rises, so the order is worth re-checking when rates change.
• Promotional rates. A 0% or low introductory rate puts a debt at the bottom of the avalanche list only while the offer lasts. Fees for transferring a balance, and the rate after the offer ends, belong in any comparison.
• Fees and penalties. Some loans charge for early repayment. An extra payment that triggers a fee is worth less than its face value.
• Secured versus unsecured debt. Debts secured on a home or vehicle carry different consequences from unsecured cards. Our guide to overpaying a mortgage versus saving covers mortgage-specific charges and allowances.
• An emergency buffer. Putting every spare unit of money towards debt leaves nothing for an unexpected bill, which can lead straight back to borrowing.

Running your own numbers

For a single debt, the loan calculator shows how extra monthly payments shorten the term and reduce interest, with a full schedule. For the cost of leaving a balance to grow, the compound interest calculator shows how a rate compounds over time; a debt left unpaid grows by the same arithmetic as savings, only against you. And to make sure every APR you are comparing is on the same basis, our guide to APR, AER and nominal rates explains how lenders quote them in different countries.

The monthly rules used in the worked example (interest rounded to the cent, minimums first, the remainder to the target, a constant budget so freed minimums roll over) are set out in full on the methodology page, so you can reproduce every figure in this guide in a spreadsheet.

This guide explains how things work in general terms. It isn’t financial, tax or legal advice. Spotted something out of date? Email errors@moneyotter.com and we’ll check it against the source.