Avalanche vs. Snowball: What’s the Best Way to Manage Debt That’s out of Control?

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According to a recent report by the Organization for Economic Co-operation and Development, Canadian households lead the world when it comes to debt. Perhaps you’ve taken on too much debt yourself, from student loans, car loans, your mortgage, or credit card debt, and it’s starting to feel unmanageable and out of control. What’s the best way to tackle it, the debt avalanche method or the debt snowball method?

The Debt Avalanche vs. the Debt Snowball

In the debt avalanche method, you focus on paying off the debt with the highest interest rate first. The higher the loan interest, the more expensive it is to carry that debt and the longer it will take to pay it off, so get rid of it first. In the debt snowball, you pay off the smallest loan balance first and work your way up, eventually tackling your largest debt. Note that both methods require that you make minimum payments on all but one debt (the one you focus on paying down first), in order to minimize damage to your credit score. 

The debt avalanche method, which saves both money and time, seems like the obvious choice. So why would you consider using the debt snowball method at all? The reason is that getting rid of your debt, one by one, is very satisfying, like ticking things off your to-do list. Starting with an easy win can provide further motivation to continue tackling increasingly larger debts until you’re debt-free.

If you’re trying to decide which method best suits you, remember that just like an exercise regime, the best program is the one you can stick with. 

Best of Both Worlds

Perhaps the best solution is to combine both methods. Start with the snowball method and focus on paying off one or two smaller balances. Accomplishing that may motivate you to switch to the avalanche method, tackling high interest rate debt, like outstanding credit card balances.

Another strategy to consider is a debt consolidation loan. If you qualify, you can use this loan to pay off all of your other debts, leaving you with one large loan and one monthly payment, usually at a lower interest rate.  

Get Help

If you need some guidance and support, consider seeking out the services of a non-profit credit counselling agency like Credit Canada. They can help you avoid bankruptcy, become debt-free and achieve financial wellness.

Once you’ve worked hard to pay off all of your debt, try not to let your debts get out of control again. Make an effort to live within your means by sticking to a budget and spending less than you make. Perhaps you can even redirect the amounts that were going towards loan repayment into long term savings by paying yourself first.