Simple Solutions To Financial Freedom

The Debt Payment Method: Avalanche vs. Snowball

by | Jul 2, 2021 | Debt |

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Are you buried in credit card debt, car loans, and student loans? How do you plan on paying off the debt? There are a number of ways to handle your debt, like calling creditors and seeing if they are willing to negotiate your debt or interest rates. However, in this article, we will explore two different ways of approaching your debt; avalanche and snowball.

It is unclear where the names came from however, they both represent a huge pile of snow, or in this case debt. In both cases, you will pay something to each of your creditors each month, however, where they differ is in who will receive the largest amount of your income.

Step one when developing any debt reduction strategy is to make a list of your debt. Include the following:

  • Name of the creditor
  • Total amount due
  • Minimum monthly payment
  • Interest Rate
  • Due Date

Create a spreadsheet or chart showing all of your debt so that you have a clear picture in your mind. Often when we try to manage debt from memory we forget a smaller bill or have incorrect data in our minds.

Avalanche Method: If you decide to use the avalanche method of debt reduction you will pay all of your creditors the MINIMUM month payment due except for one. Single out the debt that has the HIGHEST interest rate and each month send them the minimum amount plus every extra penny you can spare. The faster you reduce the debt with the highest interest rate, the smaller the total amount you will end up paying.

Snowball Method: When you use the snowball method you will also pay the minimum to all of your creditors with one exception and that is the smallest total amount you owe. You will end up paying more in interest once your debt is clear, but you will reduce the number of creditors you have quicker.

NOTE: Regardless of which method you select, you need to pay all of your bills before or by the due date to avoid your debt increasing with late fees. The last thing you need is an easily avoidable $25 or $35 in fees tacked onto your overall amount owed.

Investopedia offers a clear example to show you the difference of each method:

For example, if you have $3,000 extra to devote to debt repayment each month, then the debt avalanche method will make your money go the furthest. Imagine that you have the following debts:

  • $10,000 credit card debt at 18.99% annual percentage rate(APR)
  • $9,000 car loan at 3.00% interest rate
  • $15,000 student loan at 4.50% interest rate

In this scenario, the avalanche method would have you pay off your credit card debt first, then allow you to pay off your remaining debt in 11 months, paying a total of $1,011.60 in interest. The snowball method would have you tackle the car loan first, becoming debt-free in 11 months, but you would have paid $1,514.97 in interest.

Whichever method you use, if you are feeling overwhelmed, give us a call. Our attorneys are on hand to meet with you and assess your current situation. Recently, Bankruptcy Advocates announced that by Act of Congress, we have been designated a Debt Relief Agency. This means we are a recognized resource to help you with your financial debt. We are here to help recommend the possible avenues you have to get to a point where your debt is manageable and the problem issues surrounding your financial picture are minimized. 618-549-9800

Southern Illinois Bankruptcy Attorney law firm, Bankruptcy Advocates is proud to state that by Act of Congress, we have been designated a Debt Relief Agency.

We are located in Carbondale and serve a wide geographic community including Carbondale, Murphysboro, Marion, West Frankfort, Johnston City, Benton, Herrin, DuQuoin, and Pickneyville. Our southern Illinois bankruptcy attorneys help people file for relief under the Bankruptcy Code. Give us a call at 618-549-9800 or email us at [email protected]  to speak about your case or legal matter. Convenient appointment times are available. We can meet using Zoom or in person.