Managing debt is a crucial step toward financial freedom. Once you get debt under control, you’ll have a lower debt-to-income ratio, potentially an improved credit score, and overall less financial anxiety. For Canadians facing multiple sources of debt—credit cards, student loans or lines of credit—choosing the right repayment strategy can make all the difference in how soon and how stress-free your debt-free journey will be.
Two successful repayment strategies are the debt snowball (paying the smallest debt off first) and debt avalanche (paying off the debt with the highest interest rate first) approaches. This article will examine both methods, compare their advantages and disadvantages and help you decide which debt repayment approach is a better match for your financial situation.
Key Points
- The snowball and avalanche methods are debt repayment strategies, each with its pros and cons.
- The snowball method focuses on paying off the smallest balance first to build motivation, while the avalanche method targets the highest-interest debts to save money.
- The best approach will depend on your financial situation, motivational style, and overall financial goals.
Overview Of Snowball Vs. Avalanche Method
| Snowball Method | Avalanche Method | |
| Definition | Pay off the smallest debts first, then move to larger ones. | Pay off the debt with the highest interest first. |
| Timeframe | May take longer since it prioritizes small balances, meaning higher interest debts can continue increasing in size. | Can be faster and save you more money overall since it focuses on high-interest debts first. |
| Interest Paid Over Time | May be higher because high-interest debts may be paid last. | Lower overall interest since high-interest debt payment is prioritized. |
| Best For | Individuals who want to see their debts disappear quickly. | Individuals focused on minimizing interest and saving money. |
Debt Snowball Method
The snowball method is a debt repayment approach that emphasizes paying off the smallest debt first, then going to the next smallest and so on until you’ve paid off all your debt. Once a debt is eliminated, you take the money you were putting toward it and add it to the minimum payment, you were making for your next smallest debt.
This creates a “snowball” effect as your available funds to pay down debt grow with each balance you pay off in full.
How Does The Snowball Method Work? A Step-By-Step Process
- List All Of Your Debts. From smallest to largest, list all your debts by the amount you currently owe.
- Prioritize Paying Off The Smallest Debt First. Start putting as much as you can toward the smallest debt, while continuing to make minimum payments on the other balances. It’s important to keep up with minimum payments of all debts so you’re not charged additional fees and prevent further damage to your credit score.
- Pay Off One Debt, Then Move To The Next. Once the balance of your smallest debt is eliminated, go to the next smallest. Using the money freed up from the first payment to make even larger payments towards your next smallest debt.
- Continue Till All Debts Are Paid Off. Continue this process until all your balances are paid off in full.
Snowball: A Numerical Example
With the snowball method, you begin by targeting the debt with the smallest balance (credit card A with a $500 balance), regardless of its interest rate.
| Debt Type | Balance | Interest Rate | Minimum Payment |
| Credit Card A | $500 | 18% | $25 |
| Credit Card B | $1,200 | 22% | $25 |
| Personal Loan | $3,000 | 10% | $300* |
Assuming you have $600 to spare each month for debt repayments, here’s how you’d allocate your payments using the snowball method:
| Month | Credit Card A Payment | Credit Card B Payment | Personal Loan Payment | Total Payment | Remaining Balance for Credit Card A | Remaining Balance for Credit Card B | Remaining Balance for Personal Loan |
| 1 | $275 | $25 | $300 | $600 | $225 | $1,175 | $2,700 |
| 2 | $225 | $75 | $300 | $600 | $0 | $1,100 | $2,400 |
| 3 | $0 | $300 | $300 | $600 | $0 | $800 | $2,100 |
| 4 | $0 | $300 | $300 | $600 | $0 | $500 | $1,800 |
| 5 | $0 | $300 | $300 | $600 | $0 | $200 | $1,500 |
| 6 | $0 | $200 | $400 | $600 | $0 | $0 | $1,100 |
| 7 | $0 | $0 | $600 | $600 | $0 | $0 | $500 |
| 8 | $0 | $0 | $500 | $500 | $0 | $0 | $0 |
In this example, you’d have paid off Credit Card A in 2 months, Credit Card B in 5 months, and the Personal Loan in 8 months.
Pros Of The Snowball Method
- Quickly paying off some small balances can provide much-needed encouragement, which can motivate you to keep tackling your debt.
- The snowball method is simple to understand and implement.
- Great for those who need psychological encouragement to stay on track with debt repayment.
- By eliminating smaller debts first, you quickly reduce the number of bills you need to manage each month, simplifying your finances.
Cons Of The Snowball Method
- Because you’re not concerned with which debt has the higher interest rate, you may pay more in interest in the long term.
- Can take longer to become debt-free compared to the avalanche method because high-interest debt may continue to accumulate.
- Possibility that you’ll lose steam during the process and be less disciplined with dealing with larger debts, which can seem more overwhelming.
Debt Avalanche Method
The avalanche method is a debt repayment strategy that focuses on paying off debts with the highest interest rates first, regardless of the balance owing. This approach decreases the amount of interest you’ll pay overall and can help you eliminate debt faster while saving you money.
Like the snowball method, you’ll continue making the minimum payments on your other debts while you focus on repaying the debt with the highest interest rate, regardless of the balance.
How Does The Debt Avalanche Method Work? A Step-By-Step Process
- List All Of Your Debts. List all of your debts, ranking them from the highest to the lowest interest rate.
- Prioritize Paying Off The Debt With The Highest Interest Rate First. Focus on putting as much money as possible towards the debt with the highest interest rate first, while making minimum payments on your other debts.
- Pay Off One Debt, Then Move To The Next. Once the highest-interest debt is paid off, move to the next highest and so on until you’ve paid off all your debts.
Learn more: How To Save Money And Pay Off Debt
Avalanche Method: A Numerical Example
For example, using the same scenario we saw above, we’d start repaying Credit Card B first, then Credit Card A, and then the personal loan.
Similar to the snowball method, you’ll make the minimum payments on Credit Card A and the personal loan and then put the rest of your available funds for debt repayment toward Credit Card B.
For example, if you have $600 available for debt repayment, you can allocate $275 toward Credit Card B after you make the minimum payments on the other two debts. Once you’ve paid off Credit Card B, you can put the $275 toward the next highest interest debt (Credit Card A).
| Debt Type | Balance | Interest Rate | Minimum Payment |
| Credit Card A | $500 | 18% | $25 |
| Credit Card B | $1,200 | 22% | $25 |
| Personal Loan | $3,000 | 10% | $300 |
Pros Of The Avalanche Method
- Reduces the amount of interest you’ll pay over time.
- By focusing on high-interest debts first, you increase the amount of money you’ll save on interest, freeing up more funds for your other financial goals.
- Leads to faster debt repayment by focusing on high-interest debts.
- Knowing you’re paying back the most expensive debts first can help reduce anxiety about accumulating interest.
Cons Of The Avalanche Method
- If your high-interest balances are big, it may take months before you see any progress, which can potentially be discouraging.
- May require greater discipline and patience than the snowball method, as you’re prioritizing long-term financial savings over more immediate, emotionally satisfying progress.
- Some may find this method more complex because it requires careful tracking of interest rates and balances, which can be confusing for some if there are many debts with different rates.
Which Method Is Right for You?
Choosing between the snowball and avalanche methods isn’t a one-size-fits-all decision. The best approach to debt repayment is going to depend on the type of debt you have, your personality (do you need lots of encouragement or care most about saving money?) and your overall financial goals. Here are some points to consider when deciding which method is best for you.
Motivation Style
If you’re motivated by quick wins and want to see progress as quickly as possible, the snowball method may be your best option. If saving money in the long term is your goal and you have the discipline to stick with a plan even if progress feels slow at first, the avalanche method is ideal.
Financial Situation
If you have several high-interest debts that are costing you a significant amount each month and causing you a lot of financial stress, the avalanche method will help you save money overall. If you have mostly small debt amounts with similar interest rates, the snowball method could be the right approach while providing more frequent wins.
Timeframe
If you want to become debt-free as soon as possible, the avalanche method is often faster, though it may require patience to see your first debt paid off. The snowball method could take longer, but provides more immediate satisfaction as you clear individual debts early on.
Learn more: How To Pay Off Debt Faster
Cash Flow and Budget Flexibility
Consider how much extra money you can likely consistently put toward your debt repayment each month. If your budget is tight or cash flow can be unpredictable, the snowball method’s focus on smaller debts might be easier to manage if you’re short on cash some months. If you have a steady income and can reliably make larger payments, the avalanche method could help you make the most of your money.
Hybrid Approach
Of course, you don’t have to stick with just one repayment method. Be flexible and adopt a hybrid approach when necessary. For example, you could begin your debt-free journey with the snowball method and once you’ve built up momentum and have started to see your debt shrink, switch to the avalanche strategy to repay high-interest balances and save more money as you progress.
Other Debt Repayment Strategies
While the snowball and avalanche methods are two of the most well-known ways to get a handle on debt, there are several other effective debt repayment strategies to consider.
Debt Consolidation
Debt consolidation is when you combine all of your debts into a single loan with a lower interest rate. So you’d use something like a personal loan or line of credit to pay back all of your debts and then only have to make payments on the one loan or line of credit. The idea is to get a loan with a lower interest rate than the average rate on your existing debts, which can save you money on interest and make repayment much more manageable.
Learn more: Debt Consolidation Loans
Debt Management Plan (DMP)
A DMP is an official repayment arrangement for your unsecured debt (like credit cards and personal loans) set up by a certified credit counsellor who negotiates with your creditors on your behalf. The payment plan usually involves a reduced interest rate, waived fees and a more manageable payment schedule (over up to 5 years).
Learn more: Debt Management Program (DMP)
Refinancing
Similar to debt consolidation, refinancing involves taking out a new loan (often at a lower interest rate) to pay off existing debt. For example, if you have several personal loans, you can negotiate with your current lender or a new lender to secure better loan terms.
If you’re a homeowner with equity in your home, you can use a cash-out refinance to access cash and roll your high-interest debts into your mortgage.
Conclusion
The snowball method (paying off smaller debts first) and the avalanche method (paying off high-interest debt first) each have their own pros and cons. Before adopting a method, it’s vital to assess your personal financial situation, what motivates you and your overall goals when deciding between the two methods. Remember, there’s really no universal “best” method; what matters most is choosing a strategy that keeps you motivated and on track to be debt free.
Whichever solution you go for, the key is to stay consistent, keep making your minimum payments on all debts and avoid taking on new balances. You’ll soon be on your way to a stronger financial future.
