Debt management is a crucial aspect of financial well-being, and various strategies exist to help you become debt free. Two of the most well known methods of debt management that you may have heard of are the Debt Avalanche and the Debt Snowball. While both aim to eliminate debt systematically, they differ in their focus and execution. In this blog, I will delve into the details of each method, empowering you to make an informed decision based on your financial circumstances and preferences.

The Debt Avalanche Method

The first debt management strategy that we’ll look at today is the Debt Avalanche method. It entails organising your debts based on their interest rates, from the highest to the lowest. While making minimum payments on all your debts, you channel any extra funds towards the debt with the highest interest rate. This systematic approach, akin to an avalanche, prioritises knocking down the most expensive debts in the long term.

Imagine that I had £500 per month dedicated to debt repayment. In the debt avalanche method, I would direct the the majority of these funds towards the highest-interest debt. Once this debt is cleared, I would shift my focus shifts to the next-highest-interest debt, utilising the funds originally allocated to the now-settled debt. I would continue this process continues until all debts are paid off.

As an example, consider three debts:

Debt A: Credit card with a 24.65% APR, £5,000 balance, and £100 minimum payment.

Debt B: Credit card with a 24.65% APR, £12,000 balance, and £200 minimum payment.

Debt C: Car loan with a 9.32% APR, £10,000 balance, and £150 minimum payment.

These adjustments reflect the average credit card interest rate of 24.65% in the UK as of January 2025

and an average car loan interest rate of 9.32% for borrowers with excellent credit scores.

Applying the debt avalanche method, you would prioritize Debts A and B equally, as they now share the same interest rate. You’d make monthly minimum payments on Debts A, B, and C (£450 total) and allocate any remaining funds towards either Debt A or B until one is fully paid off. Subsequently, the funds previously directed to the paid-off debt would be redirected to the remaining debts, expediting their repayment.

It’s important to note that interest rates can vary based on individual credit profiles and lender policies. Regularly reviewing and updating your debt repayment strategy ensures it aligns with current financial conditions.

Pros and Cons of the Debt Avalanche Method

Pros:

• Reduces the total interest paid.
• Shortens the time to become debt-free.
• Suitable for individuals with a budget-oriented mindset.

Cons:

• Requires discipline and commitment.
• Relies on a consistent discretionary income.

The Debt Snowball Method

The second debt management strategy that we’ll look at is the snowball method. It prioritises paying off the smallest debts first, regardless of interest rates. This approach aims to build momentum by achieving quick wins. The process involves listing debts from smallest to largest, making minimum payments on all but the smallest debt, and directing as much extra cash as possible towards paying off the smallest debt.

Using the same £500 per month for debt repayment, you start by focusing on the smallest debt. Once you pay it off in full, you redirect the funds previously allocated to it toward the next smallest debt, creating a snowball effect.

Consider the same debts as above, now updated with current interest rates:

• Debt A: Credit card with a 24.65% APR, £5,000 balance, and £100 minimum payment.
• Debt B: Credit card with a 24.65% APR, £12,000 balance, and £200 minimum payment.
• Debt C: Car loan with a 9.32% APR, £10,000 balance, and £150 minimum payment.

In the debt snowball method, I would make minimum payments on all debts except Debt A, as it has the smallest balance. With £500 a month, I would pay £150 towards Debt C, £200 towards Debt B, and direct the remaining £150 towards Debt A.

Once I repay Debt A in full, I will snowball the payments by targeting the next lowest balance—Debt C. I will apply the £150 that previously went to Debt A, along with Debt C’s minimum payment. I will repeat this process until I pay off all debts.

While the snowball method doesn’t focus on interest rates, it provides psychological wins by clearing debts faster, which can help with motivation and consistency in your debt repayment journey.

Pros and Cons of the Debt Snowball Method

Pros:

• Builds motivation through quick wins.
• Simplifies the process by focusing on debt size rather than interest rates.

Cons:

• Does not minimise overall interest payments as much as the debt avalanche.
• May take longer to achieve complete debt freedom.

Which One Would Suit You Better?

Determining the best method for you, depends on your unique financial circumstances and personal preferences. From a financial standpoint, the debt avalanche is more efficient in terms of saving money. However, the debt snowball method may be more appealing to those motivated by quick results.

Key Takeaways

Excessive credit card debt can impede financial goals, but have hope because various strategies exist to overcome it.

Debt payoff methods range from strategic approaches like the avalanche and snowball methods to consolidation products.

The best method depends on what works for you. Remember that personal finance is personal and what one works for one person, may not work for you!

Final Thoughts

It is essential to think about and select the right debt payoff method for you. The debt avalanche method provides a strategic approach to tackle high-interest debts and potentially save money in the long run. However, the avalanche method provides you with quick wins and is therefore great for moral!

Remember, every financial situation is unique, so assess your circumstances before deciding on a method. Whether it’s the debt avalanche, the debt snowball, or another approach, the key is taking proactive steps toward paying off your debt and securing a brighter financial future.

For more detailed information, debt advice and practical help, I always forward my clients to Sara Williams at Debt Camel.

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