Paying down credit card debt: The avalanche vs the snowball method
Two popular methods with different approaches to whittling down debt may help you reach your financial goals.
Feb. 23, 2023
4-minute read
Looking to get a handle on your finances this year, including credit card debt? You're in good company. The newly released CIBC Financial Priorities & Confidence Poll indicates more people have seen their debt grow over the past year and 18% have said paying it off is their top financial goal for 2023. Driven by an increased cost of living, one in four Canadians have taken on more debt, especially with credit card balances and mortgages.
While you can't control what happens in the economy, you can take charge of your finances by tackling debt. Paying debt off isn't easy but sticking to a strategy can help.
There are two popular debt repayment tactics to consider: the avalanche method and the snowball method. Which one you use really depends on what will motivate you to stay focused.
Avalanche method: it's about the math
The avalanche method prioritizes paying off debts with the highest rates of interest first, like credit cards, while making minimum payments on other debts. You then work your way through those debts with lower interest rates.
Here's an example:
Let's say you have a credit card balance of $12,000 at 20% interest, a student loan of $20,000 at 0% and a personal loan of $25,000 at 6%. Following the avalanche method, you would tackle the credit card balance first, followed by the personal loan, and finally, the student loan. You'll save money in the long run by paying off the debt with the highest interest rate before other debts.
Snowball method: it's about motivation
With the snowball method, you pay down debts according to balance size. Start by paying off smaller debts first, which leaves you with fewer debt repayments overall. Then, take the amounts you were paying toward the smaller debts, roll them into paying down the second largest debt, and so on. Momentum builds, like a snowball rolling down a hill, as you pay off each debt.
Here's an example:
Let's say you have one credit card with a balance of $6,000 at 20%, another one with a larger balance of $8,000 at 22% and a $33,000 car loan at 5%. With the snowball approach, you would pay down the $6,000 credit card balance first. This should give you a psychological boost to tackle the second largest debt of $8,000 before moving on to the largest debt, the $33,000 car loan.
Avalanche or snowball — which one is best for you?
Avalanche
The good
Save more money over the long-term. Focusing on debts with the highest interest rates first means you'll pay less interest overall.
The not so good
It can feel like a slog. The debt with the highest interest rate may have the largest balance. You may feel discouraged as you chip away without seeing significant progress.
Is this you?
You’re methodical and patient and want to minimize the total amount of interest paid on debt. You have balances with higher interest rates you’d like to pay down quickly.
Snowball
The good
It’s a quick win. Celebrating small wins at the start of your debt repayment journey may give you the emotional boost needed to chip away at your overall debt.
The not so good
You may pay more interest. Because you're focused on smaller debts first, interest could build up on other debts, extending the time needed for repayment.
Is this you?
You’re someone who needs short-term wins to stay motivated while paying off multiple debts. You have several smaller debts and you want to gain confidence by eliminating them first before tackling larger ones.
Other tips to keep in mind
- Make minimum payments: No matter which repayment method you choose, don't forget to make required minimum payments on other debts in the meantime to avoid late or missed payment fees.
- Keep track of your spending: Stick to your budget as you work to pay down debt and avoid racking up additional debt. Get a clear breakdown of your cash flow by using our Budget Calculator.
- Focus on the long-term: Getting out of debt isn't easy. But setting goals, like working towards a down payment on a home or a vacation, may help provide the motivation you need to stay on track.
No right or wrong approach — just get started
Quick wins or a slow methodical approach? Whatever you choose, stick to what motivates you. Build on your momentum and crush that debt.
Need some financial advice?
Book a chat with one of our advisors. They can help set you up for success, today and into the future.
