How to Pay off Debt Fast: Two Methods You Need to Know

Sad but true: if you have debt, you know that the balance in your savings account can be more of an illusion. It often seems like there’s an underwater glacier that’s pulling any net balance in your account to a negative.

But no need to despair. There are some tactics to help you methodically pay off money owed.

For instance, you may have heard the terms “avalanche” and “snowball” debt repayment methods tossed about. No, it doesn’t involve hiding out in a snowy mountain range until your debt load magically disappears, although that would be pretty awesome. Instead, these are two common tactics to pay off your debt, whether you have student loans, credit card debt, personal loans, car loans, and so forth.

As September is the Month of Budgeting here at Chime, we are taking a deeper dive into these two popular debt repayment strategies. Read on to learn more about  the pros and cons of both, and from there you can figure out which budgeting method is best for you.

Avalanche Debt Repayment Method

With the avalanche debt repayment method, you will first make the minimum payments on all your debts. You will then focus on tackling the debt with the highest interest rate, paying the minimum payment plus extra payments each month. After you’ve crushed the first one, you then take the money you would use to pay off that debt and move onto the debt with the next-highest interest rate. (Note: we highly recommend setting up automatic savings, so you don’t spend the money you need to pay off your debt.)

To keep things simple, let’s just focus on credit card debt. Let’s say you have three credit cards, each with varying balances and interest rates:

Card A – Balance: $800, Minimum Payment: $50; Interest Rate: 25%

Card B – Balance: $2,000, Minimum Payment: $45: Interest Rate: 22%

Card C – Balance: $500, Minimum Payment: $40: Interest Rate: 20%

Because you’re doing the avalanche debt method, you’ll first make minimum payments on all three cards. In this scenario, you’d then also throw down $200 each month toward the credit card with the highest interest rate (in this case Card A with an interest rate of 25%).

After you’ve finished paying off Card A, or “mother lode interest rate (25% APR)” card, (congrats, btw), you put the minimum payment on Card B ($45) and Card C ($40), plus an extra $200 toward Card B (with the second highest interest rate of 22%.) Once you’ve paid off Card B, you’re left with Card C to pay off.

Pros

  • Pay off your debts faster. Because you’re throwing down larger chunks of cash toward your debt, you’ll make faster headway.
  • You save more money on interest. Because you’re tackling debt that costs you more in pesky interest rates (they add up quickly, trust me), you’ll be saving more moola.

Cons

  • Depending on your situation, you may not be able to afford to make the minimum payments, plus extra every month. If you do, it may not feel like you’re making much of a dent.
  • If the balance with the highest interest rate happens to have the largest amount of debt, it could it could take months to pay it off.

Snowball Debt Repayment Method


With the snowball debt repayment method, you will also make the minimum payments on all your debts. But there are two major differences between the snowball and avalanche repayment methods.

1. Instead of focusing on interest, you make payments based on your balances.

2. Instead of first paying off the debt with the highest interest rate, you start with the one with the lowest balance.

So, to illustrate this, let’s use the same three cards as we did with our Avalanche Debt Repayment example:

Card A – Balance: $800, Minimum Payment: $50; Interest Rate: 25%

Card B – Balance: $2,000, Minimum Payment: $45: Interest Rate: 22%

Card C – Balance: $500, Minimum Payment: $40: Interest Rate: 20%

In this case, you’d start with making extra payments on Card C (balance of $500) until it’s completely paid off. Next, you’d take the extra monthly payments you were making on Card C and put them toward Card A, which is the card with the next-highest balance (balance of $800). Once Card A is paid off, you then put all your efforts into Card B (balance of $2,000).

Pros

  • You enjoy wins early in the game. It’s quite motivating to knock out your first debt.
  • Because you’re focusing on the debt with the smallest balance, you can make greater strides with less money.

Cons

  • The biggest downside of the snowball method is you don’t save as much in interest. In other words, you’ll be paying more.

So which method is best? In the realm of social science and human behavior, research reveals that even though rationally we may want to save more, most people stay more motivated by taking care of the debts with the smaller balances.

That being said, it’s still ultimately up to you to decide. We’re not here to sway you one way or the other. Like all things in personal finance, there’s no one-size-fits-all solution. It really depends on what motivates you the most. Would you rather save more in interest, or knock out the smaller debts first?

Tips on Getting Started

Ready to nip your debt in the bud? Here are some pointers on kick-starting the process: 

  • Add up all your debts. Once you’ve decided which repayment debt plan you’d like to go with, tally up all your debts so you can see your balances, interest rates, terms, and fees. Pro tip: there are lots of money management and money-saving apps that allow you to view your debts at-a-glance. The key here is to figure out which debt to tackle first. If it’s been a while since you’ve paid close attention to a particular account, reach out to a representative and get the deets. This will help you make an informed decision.
  • Track your progress. There are a ton of creative ways to track your progress, including a debt payoff thermometer, a Pac-Man style board game where each square or circle represents a certain amount of cash, and you color in each square as it gets paid off.
  • Open a savings account once your debt is paid off. Once your debt is paid off, you can take your money and throw it toward whatever you like—vacation, splurge fund, a car, and what have you. Just make sure you open a savings account for your new goal. This way you can ensure you’re making steady headway.

You Got This

No matter which debt repayment method you choose, here’s the thing: the fact that you’re making it a priority is king. And by keeping debt payoff top of mind, you’ll be on your merry way to crushing it.

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