In the debt world, two major payment styles go head-to-head. In one corner, there’s the avalanche method, which prioritizes high-interest loans and lines of credit. On the other hand, the snowball method focuses on the account with the smallest outstanding balance.
With such different approaches, each method has its pros and cons. For example, the avalanche method promises to save you the most money by axing loans that accrue interest the fastest. However, studies show that people who follow the snowball method will most likely clear their debts.
Cover The Minimum Payments Regardless Of Your Choice
Before you get started with either option, you must sit down with your budget to ensure you can pay the minimum payments on every account. The online loan experts at MoneyKey encourage savvy borrowers to do this, regardless of their debt payment style.
Paying the minimum on installment loans, lines of credit, and credit cards ensures you avoid late fees and pay off your debt according to your lender’s approved schedule.
Your choice of debt payment style will establish which loan or line of credit you will pay ahead of schedule, using extra cash to go above and beyond the minimum.
What Is The Snowball Method?
The snowball method prioritizes the smallest outstanding balance before you move up the chain of debt. To follow it, you must pour all your extra cash towards the smallest account in addition to its monthly minimum until you pay off what you owe.
Once this account is closed, you can move to the next smallest balance on your list. But here’s the trick — now that you’ve paid off the first account, you can roll in what you put towards it (i.e., the extra cash and its monthly minimum) into the next account.
With each account you pay off, your payments against the next debt will be bigger. In other words, you are snowballing your payment sizes.
That’s how this method got its name. Like a snowball that grows as it continues to roll downhill, your debt payments increase as you move through your loans. You harness the momentum of little payments until you can take out big debt.
What Is The Avalanche Method?
The debt avalanche method flips the snowball strategy, switching from balances to interest rates. Instead, you focus on paying down the outstanding balance with the highest interest rate or Annual Percentage Rate (APR) to control how much interest you accrue over time.
You’ll put your extra cash towards the biggest APR while making the minimum payments on everything else. Once you close this account, you can start paying down the loan with the next biggest APR. Again, you’ll take what you were paying on the first account and then use that amount and other freed-up cash towards the second debt, plus the second’s monthly minimum.
The avalanche method’s biggest perk is that it knocks out the account earning the most interest first, so you’ll accrue less interest overall. So, like a devastating mountain avalanche, this method can crush debt more effectively and save money over time.
The Psychology Behind The Snowball Method
Paying less interest sounds like the better deal, but you shouldn’t write off the snowball method just yet.
In 2012, researchers at Northwestern’s Kellogg School of Management found that borrowers who rely on the snowball method are likelier to eliminate their overall debt. That’s because snowball followers could usually close debt accounts earlier than their avalanche counterparts. This early success motivated them to keep up the hard work of paying off other debts.
Another study published by the Harvard Business Review echoes their findings. In 2016, Harvard researchers found that the snowball repayment strategy significantly affected borrowers’ sense of progress.
The snowball method uses the power of small wins to help you stay motivated. Because let’s face it — taking control of your finances and paying down debt is hard work; you need as much encouragement as possible.