Debt Snowball vs. Debt Avalanche: Which Method Works Best for Tackling Credit Card Debt?

Struggling with credit card debt can feel like an endless cycle, but the good news is there are proven strategies that can help you break free. Two popular methods for tackling debt are the Debt Snowball and Debt Avalanche approaches. Both strategies focus on paying off more than the minimum required, but the order in which you pay off your debts differs. So, which method works best for paying off your debt: the Debt Snowball or the Debt Avalanche?

The answer might not be as straightforward as you think. One method promises quick wins that can fuel your motivation, while the other focuses on saving you the most money in the long run by targeting high-interest debts. Sounds simple enough, right? 

But what if your financial situation doesn’t fit perfectly with either method?  Is there a clear winner, or could the best approach be somewhere in between? 

Ready to determine which method might work best for your credit card debt? 

Average Credit Card Debt in Canada: What the Numbers Say

As of the third quarter of 2023, Canadians’ credit card debt reached an all-time high of $113.4 billion, marking a 16% increase from the previous year. The average credit card debt in Canada per cardholder rose to $4,119, up from $3,727 in 2022. This surge reflects the growing financial strain faced by many Canadians, driven by rising living costs, high interest rates, and a slowing economy. Additionally, over six million new credit cards were opened in the past year, highlighting a trend of increased borrowing. More Canadians are relying on credit cards to cover everyday expenses, with many opting to make only minimum payments, leading to a cycle of mounting debt. With total consumer debt in Canada now at $2.4 trillion, experts warn that the impact of high interest rates and inflation will continue to challenge household budgets in the months ahead.

What Is the Debt Snowball Method?

If you’re wondering how to pay off credit card debt, this method can be one of the most effective approaches. The Debt Snowball Method is a debt repayment strategy that focuses on paying off your smallest debts first, gradually gaining momentum as you move on to larger debts. The idea behind this method is to build motivation by achieving quick wins, which can help you stay on track toward becoming debt-free. It’s a strategy that emphasizes emotional satisfaction, which can be just as important as the financial aspects when it comes to managing and eliminating debt.

How It Works

To start, you list all of your debts, from the smallest balance to the largest, regardless of the interest rates. You continue making the minimum payments on all your debts to avoid penalties and fees. The key step is to direct any extra money you have toward paying off the smallest debt first. Once the smallest debt is paid off, the money you were putting toward that debt gets rolled over to the next smallest debt. This process creates a snowball effect, where your payments increase as you eliminate each debt, accelerating your progress as you go.

Example

Let’s say you have the following debts:

  • $1,300 credit card debt (15.74% APR) with a minimum payment of $35
  • $4,200 credit card debt (22.24% APR) with a minimum payment of $120
  • $6,400 student loan (6.3% APR) with a minimum payment of $100
  • $10,750 car loan (7.2% APR) with a minimum payment of $175

In the first phase, focus on paying off the $1,300 credit card debt. Let’s say you can put an extra $220 toward it each month, so you’ll pay a total of $255 ($35 minimum + $220 extra). This will allow you to pay off the $1,300 debt in about six months. Once the $1,300 is cleared, take the $255 payment and apply it to the next debt, the $4,200 credit card. You continue this process, rolling over the payments to the next smallest debt until all debts are paid off.

What Is the Debt Avalanche Method?

The Debt Avalanche Method is a debt repayment strategy where you prioritize paying off debts with the highest interest rates first. By focusing on high-interest loans, you minimize the amount of interest you pay over time, helping you pay off your debt faster and more efficiently.

This method differs from other strategies like the Debt Snowball Method, which focuses on paying off the smallest debts first.

How It Works

To begin, you list all your debts in order of interest rate, from highest to lowest. Next, you continue making the minimum payments on all debts, but any extra funds you have go toward the debt with the highest interest rate. Once that debt is paid off, you redirect the funds to the next highest-interest debt, and so on, until all debts are paid off.

Example

Let’s say you have the following debts:

  • Credit Card A: $1,500 balance at 18% APR, minimum payment $50
  • Credit Card B: $4,000 balance at 22% APR, minimum payment $100
  • Car Loan: $6,000 balance at 5% APR, minimum payment $150

In this example, Credit Card B has the highest interest rate of 22%, so you focus on paying it off first. You continue making the minimum payments on Credit Card A ($50) and the car loan ($150). Any extra funds, say $200, go toward Credit Card B, so you pay $300 per month toward that debt. Once Credit Card B is paid off, you take the $300 you were paying toward it and add it to the $50 minimum payment on Credit Card A, making a total of $350 per month. After paying off Credit Card A, you shift the $350 to the car loan, paying $500 per month until it’s fully paid off. This method helps you save money on interest and pay off debt faster.

Debt Snowball vs. Debt Avalanche For Credit Card: A Side-by-Side Comparison

Aspect Debt Snowball Debt Avalanche
Payment Focus Pays off the smallest balance first, regardless of interest rate. Focuses on paying off the debt with the highest interest rate first.
Interest Costs This results in higher interest payments overall because smaller debts are paid first, even if they have lower interest rates. Minimizes the total interest paid, as it targets high-interest debts first, saving money in the long run.
Speed to Debt Freedom It can take longer to become debt-free due to focusing on smaller balances, which may have lower monthly payments. Generally faster, as you’re paying down higher-interest debts more quickly, reducing the total amount owed faster
Monthly Payment Focus Pay minimums on all debts and use the remaining funds on the smallest debt. Pay minimums on all debts and use the remaining funds on the debt with the highest interest.
Emotional & Practical Fit Best for those who need quick wins to stay motivated and feel empowered to continue. This method works well for individuals who may struggle with maintaining motivation over time. Generally faster, as you’re paying down higher-interest debts more quickly, reducing the total amount owed faster

 

Lauren Anastasio, a CFP and director of financial advice at Stash, explains that choosing between the snowball and avalanche methods depends on your debt priorities. If you prefer quick wins, the snowball method is ideal for tackling smaller debts. On the other hand, if minimizing overall costs is your goal, the avalanche method, which targets high-interest debt first, is a better choice. Anastasio emphasizes the importance of prioritization, advising, “Instead of spreading your effort thin across multiple debts, focus on one. Pay the minimum on others and allocate every extra dollar to paying off that one debt—this is the fastest way to reduce your bills.

Conclusion 

In conclusion, both the Debt Snowball and Debt Avalanche methods are effective strategies for tackling credit card debt, but the right choice ultimately depends on your personal preferences and financial situation. The key to success is persistence and maintaining focus on your goal of becoming debt-free.

If you’re struggling with credit card debt and need guidance, don’t hesitate to reach out to Bankruptcy Canada. Our team is here to help you navigate your debt repayment journey and get back on track to financial freedom.

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