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For Your Life Devon Delfino August 19, 2024

Forget the Debt Snowball: Here's a Better Way to Pay Off Your Debt

When you live in the U.S., it can seem like all roads lead to debt. It's how we get through college, how we deal with emergencies, and how we pay for our homes. In fact, according to Experian, the average American had over $100,000 in various forms of debt in 2023.

If you're looking for a way out of debt, there are two common ways to pay it off: The snowball method and the avalanche method. While the snowball method is often touted as the best option since it can appeal to the desire to sustain motivation on a long journey to being debt free, it isn't necessarily the best option for your finances.

Here's what you need to know about the avalanche method and why it might offer a better path to becoming debt-free.

Use the avalanche method to save more money

The debt avalanche method requires you to pay off your debts in order of interest rate, ranked from highest to lowest. So the most expensive debt would get paid off first, and you'd then use the extra payment (plus the previous debt's minimum payment) to pay off the next debt.

That means you can save more money using this method instead of the snowball method, which instead focuses on paying off the smallest balances first. That's especially true if your smallest balances also have the lowest APRs.

Let's say you have the following debts:

Debt Balance APR Minimum payment
Credit Card 1 $10,000 15% $126
Credit Card 2 $15,000 25% $316
Credit Card 3 $2,500 18% $50

Data source: Chart and calculations by author.

With the snowball method, you'd pay these off in the following order:

  • Credit Card 3
  • Credit Card 1
  • Credit Card 2

If you paid an extra $500 per month toward these debts, you'd end up paying off Credit Card No. 3 in just five months, followed by Credit Card No. 1 in 17 months. Meanwhile, however, the minimum payment on Credit Card No. 2 covers the interest plus $1, so you wouldn't really be making a dent in that balance for nearly two years.

With the avalanche method, you'd pay them off in this order:

  • Credit Card 2
  • Credit Card 3
  • Credit Card 1

Here, with the same $500 monthly payment toward debt, you'd pay off Credit Card No. 2 in two years, and you'd be reducing your monthly interest payments on that card with every payment.

How to start using the debt avalanche method

Here's how to create your avalanche payoff plan:

  1. Take note of each of your debts, including the balances, APRs, and minimum payments.
  2. Decide how much you can afford to pay toward your debt (over your minimum payments), based on your budget.
  3. Order your debts by APR, starting with the highest amount.
  4. Start making those extra payments toward the highest-APR debt first.
  5. Once that's paid off, move the extra payments (plus the previous minimum payment) to the next-highest APR debt.
  6. Rinse and repeat until debts are paid off.

More ways to save on debt

Having a debt-payoff plan is a solid start, but you should look at your other options to save, too.

For example, if your credit is in good shape, you may consider looking into a 0% APR balance transfer credit card. This would allow you to place a certain amount of debt onto that card with a 0% introductory APR for a given number of months.

That would be in exchange for a balance transfer fee that typically ranges from 3% to 5% of the balance. Once that period ends, your remaining balance would be subject to the regular interest rate, so it's best to pay it off before then, if possible.

Another option could be to get a personal loan if you have a lot of high-interest debt, like credit card debt, and your credit is solid. The money would be sent to your bank account, so you could then directly pay off your cards.

Some personal loans come with an origination fee or early payoff fee. Be sure to look for those and shop around, to make sure you're getting the best deal.

Getting out of debt takes strategy, and that requires you to be informed about your goals as well as your options. But with a bit of work, you can not only save money on interest, you can also get to that debt-free finish line.

Looking for your perfect credit card? Check out Old National's credit card options.

This article was written by Devon Delfino from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.

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