Debt Avalanche vs Debt Snowball?: Don't leave your debts out in the cold.

*Update March 2023 - before deciding which method to repay debt is right for you click here to read about the difference between secured vs unsecured debt and student loan debts. According to The Money Charity in 2022 the average credit card debt per UK household stood at £2,192 with an average total debt per household of over £64,000 (including mortgage). Trying to reduce this debt is on every household's agenda and the two best-known methods for reducing debt are known as the avalanche and snowball acceleration methods. Both of them are directed towards the same overall goal of paying debts off but in slightly different ways. Which one is right for you depends on your outlook so let us look at the two methods and the positives and negatives associated with each one. With either method, you need to start tracking your spending so I would recommend setting up a spreadsheet for your monthly in and outgoings. If you don't have access to Microsoft Excel then Libre Office provides free software that works in a similar way. Setting a budget will help you prepare for the future whether you have debts to clear or want to save for the future.

Debt Snowball.

The snowball method involves tackling the smallest debt first and then rolling the cash onto the highest debt. This means that debts with higher interest amounts could be left until last so debts are not paid off as quickly however if you have struggled to pay off debts in the past it can help you get the first debt out of the way and motivate you to continue. Any win however small is progress.

The first step is to make a list. Organise the payment information with total amounts owed, minimum repayments and any due dates. Once the list has been compiled then organise them into order from the smallest debts to the largest debts owed.

Next, you need to work out how much money you have left over after meeting the minimum payments for all debts. If you do not have an emergency fund then I would recommend putting some of the remaining money into the fund and the rest towards paying off the smallest debt. Once you have paid off that debt you roll the money used to pay it off along with the additional spare money from your budget and pay that towards the next smallest debt. Keep continually doing this until all debts are paid off.

As an example, if you had £10,000 in credit card debt at 27% APR, a £5,000 student loan at 3% and a £2,500 car loan at 5% you would start with the car loan then pay off the student loan and finally the credit card debt.

Advantage: The psychological boost of seeing debts disappear provides motivation to keep going.

Disadvantage: The interest will keep rising as the debts with the highest interest won't necessarily be paid off first. It could take longer to pay the debts.

Debt Avalanche.

The avalanche method instead focuses on paying your debts with the highest interest rates first. You need to be more analytical and patient with repaying your debts using this method but in the long run you should pay less.

Make a list in the same way as the snowball method but this time arrange your debts in order of interest rate from highest to lowest. As with the snowball method try and over budget if you can to pay off the highest interest rate as quickly as possible and then continue through the list until you reach the lowest interest rate debt and finally pay them all off.

Again as an example, if you had £10,000 in credit card debt at 27% APR, a £5,000 student loan at 3% and a £2,500 car loan at 5% you would start with the credit card then pay off the car and finally the student loan debt.

Advantage: It minimises the amount of interest paid working towards the goal.

Disadvantage: If the highest debt is a large debt the danger is that you may lose motivation if you cannot see the number of debts being reduced quickly.

Which route did I follow?

I went with the avalanche method by paying off my higher credit card debt first at 19.9% APR before focusing on a loan at 5.9%. I used my spreadsheet to show my monthly repayments for each debt so I could identify when the debt would be paid off which gave me a date to focus on. Even though it may not be paid off quickly at least I could see when the goal would be reached and I could finally be debt free.

Either way, the process will not be instant so it is important to focus on the end objective and not start any new debts or add to existing ones. Once this was completed I could finish saving into my emergency fund to allow for up to three months of expenses. This will be the key to ensuring I don't end up back in debt in the future and allow me to concentrate on the next chapter of my journey; analysing my pension and looking into investments.