Debt Repayment Methods: Avalanche and Snowball

Sometimes taking a loan is necessary in order to reach your goals of going to college, owning a car or a home or running a business. Borrowing isn’t necessarily a bad thing (remember, there is good debt and bad debt) as long as you have a solid plan to pay it back as quickly as possible. What’s the rush? Compound interest. It increases the amount you owe every day you still have the debt, because borrowing money is not free!

If you have some extra money in your budget and your goal is to pay your debt off faster, the best place to start is making a list.

The list should include every debt that you owe, the interest rates, minimum payments, and outstanding balance for each.

Your next step is to sort your list by interest rate and identify the debt with the highest interest rate.

The fastest way to pay off your debt is to use the debt avalanche method that prioritizes paying off your highest interest debt first. This plan will save you the most money and get you out of debt the fastest. Another popular method is the snowball method that prioritizes paying of the debt with the smallest balance first. While this can give you early wins and boosts of confidence as you pay off small debts quickly, it can cost you more money and time if your smaller debts have lower interest rates. Whichever method you choose, the next step is important.

Pay the minimum required payments on all debts, every time.

Your first step every month should be to make all of your required minimum payments on time. Payment history is the biggest factor in your credit score, so avoiding late payments protects your credit score and keeps you from being hit with late fees or penalties.

Next, put every dollar you can towards paying off the debt with the highest interest rate.

After you’ve paid the minimums on all of your debts focus entirely on the highest interest debt. It can be tempting to spread it around and pay a little extra on everything. Don’t. Remember, there is one way to pay the least possible in interest and get out of debt the fastest and that’s the avalanche method. Focus on the highest interest debt ONLY. (If you’ve chosen the snowball method, you would focus on the debt with the smallest balance.)

That’s it. Now just repeat every month until your high interest debt is gone.

Follow those 2 steps every month (pay the minimums, everything extra goes towards the highest interest rate) and you’ll be out of debt as soon as possible and with the least paid in interest. But what if you want to speed things up even more?

If you have several credit cards with high interest rates on your list, you might consider applying for a balance transfer card that offers a low, or zero, interest rate for a period of time (usually about a year). This temporarily lowers or stops the interest adding to your current balance and gives you time to make every dollar you put toward the debt go towards lowering the principal. There are also personal loans available from many lenders as another way to refinance high interest debt into a single loan with a lower interest rate. You’ll pay less in interest over time, but make sure to account for the cost of refinancing itself, which is often added to your loan balance. BrigthDime’s coaches can help you run the numbers to see if these are good options for you. All of these methods require you to apply for new credit, so the approval and rate you get will depend on your credit history.

As you pay off debt, try to leave the the line of credit and credit cards open when possible, but stop using them. Closing them can lower your credit score since it will lower your available credit. Instead, just cut up any credit cards or put them away so you aren’t tempted to use them. Paying off your loans and other debt is good for your financial well-being and for your credit score. It will give you a boost of confidence about your future and reinforces good financial behavior.