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Debt Payoff Strategies: Snowball vs. Avalanche Method

Are you struggling with debt and looking for effective ways to pay it off? Understanding the debt snowball and debt avalanche methods can help you choose the best strategy for your financial situation. At O1ne Mortgage, we are committed to helping you achieve financial freedom. Call us at 213-732-3074 for expert mortgage services and personalized advice.

What Is the Debt Snowball Method?

The debt snowball method encourages you to pay off your smallest debt first, then use that payment amount to tackle the next smallest debt. This approach helps you build momentum and stay motivated as you see your debts disappear one by one.

How to Pay Off Debt Using the Snowball Method

1. Make a list of all your debts and order them from lowest to highest balance.
2. Put as much extra money as possible toward your debt with the smallest balance while paying the minimum balance on the others every month.
3. Once you pay off your smallest debt, put that monthly payment toward the next smallest one. Keep going with each debt until you’ve paid off all your balances.

Debt Snowball Example

Let’s say you have the following debts:

• Credit card: $5,000 at 20% interest, $150 monthly payment
• Personal loan: $1,000 at 10% interest, $200 monthly payment
• Private student loan: $10,000 at 8% interest, $225 monthly payment

If you can afford to put an extra $100 toward your debts each month, you would start by paying $300 ($200 plus the extra $100) toward the personal loan while making the regular monthly payments on the others. Once the personal loan is paid off, you would add the $300 to your credit card payment, bringing it to $450 until it’s paid in full. Finally, you would put the full $675 toward the private student loan.

Pros and Cons of the Debt Snowball Method

Pros

• Quick wins: You’ll gain momentum and stay motivated as you see smaller debts drop away.
• Easy to implement: It may be easier to order your debts by balance than by interest rate.
• Can result in more savings: Depending on your situation, you may also be able to save more interest and pay off your debt more quickly.

Cons

• Less interest savings: The debt snowball method doesn’t consider interest rates, which means you may be paying more in interest throughout the process.
• Other factors may take precedence: You may want to pay off certain debts earlier for reasons other than balance size.
• Could take longer: Since you’re not minimizing your interest payments, it could take slightly longer to accomplish your goal.

What Is the Debt Avalanche Method?

The debt avalanche method focuses on paying off debts with the highest interest rates first. This approach can save you the most money in interest over time and help you pay off your debts more efficiently.

How to Pay Off Debt Using the Avalanche Method

1. List your debts in order from highest interest rate to lowest.
2. Put as much extra money as possible toward your debt with the highest interest rate, and pay the minimum required each month on the rest.
3. Once the first debt is gone, move on to the debt with the next-highest rate. Pay extra toward that debt until it’s gone. Continue paying off each debt this way until you’ve eliminated all of them.

Debt Avalanche Example

Using the same debts as the previous example:

• Credit card: $5,000 at 20% interest, $150 monthly payment
• Personal loan: $1,000 at 10% interest, $200 monthly payment
• Private student loan: $10,000 at 8% interest, $225 monthly payment

You would start by paying $250 ($150 plus the extra $100) toward the credit card while making the regular monthly payments on the others. Once the credit card is paid off, you would increase your payment to $450 toward the personal loan. Finally, you would put the full $675 toward the private student loan.

Pros and Cons of the Debt Avalanche Method

Pros

• Interest savings: You’ll save more money by paying off high-interest debts first.
• Peace of mind: You’ll know that you’re choosing the option that puts more money back into your checking or savings account over time.
• Can save you some time: Depending on the makeup of your debt, the avalanche approach could help you pay off your balances more quickly.

Cons

• Motivation may be difficult: It may take a while to pay off your first balance, making it difficult to stay motivated.
• Other factors may be more important: There may be features of your debts beyond the interest rate that impact when you’d like to pay them off.
• More savings isn’t guaranteed: The results will depend on the details of your debt situation.

More Tips for Paying Off Debt

Depending on your situation and objectives, you may also consider other ways to pay off debt, particularly if you have a lot of high-interest credit card balances. Here are some alternatives to compare:

Debt Consolidation Loan

A debt consolidation loan is essentially a personal loan used to pay off other debt. In general, personal loans have a lower average interest rate than credit cards. They also offer a fixed repayment term, which can help you avoid getting stuck in a minimum payment trap. While it’s possible to get approved even with a low credit score, you typically need good or excellent credit to qualify for favorable terms.

Balance Transfer Credit Card

A balance transfer credit card typically offers an introductory 0% APR promotion, allowing you to pay down your credit card debt interest-free for a period ranging from 12 to 21 months. If you have a balance remaining at the end of the promotion, you’ll only incur interest on that amount. These cards typically charge an upfront fee of 3% to 5% of the transfer amount, and you also typically need good credit to get approved.

Debt Management Plan

If you’re having trouble paying down your debt on your current budget—even with these other strategies—consider consulting a credit counselor. In addition to personalized budget and debt management advice, a credit counselor may offer you a debt management plan, which could make your monthly payments more affordable. Note, however, that there are typically fees involved, and you may need to close your credit cards.

The Bottom Line

Once you’ve made the decision to pay off debt, you’ve already committed to an important and worthwhile financial move. When choosing the right debt payoff method, consider what will encourage you to maintain that drive: saving money or getting individual debts off the books. If you can consolidate some or all of your debts and pay them off at a lower interest rate, you may be able to reach your goals of becoming debt-free even sooner.

As you work to pay down your debt, check your credit score often to understand how your efforts impact your credit health and to keep track of your progress.

For expert mortgage services and personalized advice, contact O1ne Mortgage at 213-732-3074. We’re here to help you achieve financial freedom.

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