Snowball or avalanche? Two ways to clear debt

One method is cheaper, the other is easier to stick to. The difference exists because paying off debt is half arithmetic and half endurance.

You have several debts at once — a credit card, an instalment plan, money borrowed from family — and some spare cash each month. Which one do you overpay?

There are two answers and both make sense.

Avalanche: highest interest first

The avalanche method sends every spare zloty at the debt with the highest interest rate, while the rest get minimum payments only. When the most expensive one is gone, the whole surplus moves to the next in line.

This is the arithmetically optimal choice. Interest accrues on the balance, so every unit of currency thrown at a debt costing 18% saves exactly that — and always more than the same unit thrown at one costing 7%.

With several debts at clearly different rates — a credit card next to a mortgage — the difference runs into the thousands.

Snowball: smallest balance first

The snowball method ignores interest rates and closes the smallest balance first. Then the next smallest, and so on.

Arithmetically this is worse. You will pay more interest, sometimes noticeably more. But it answers a different problem: clearing debt takes years, and for most of that time nothing visible happens. The balance falls slowly, the sense of progress fades, and the plan gets abandoned.

Closing the first debt in three months instead of the first in two years is a concrete change: one payment less to track, one reminder less in the calendar, proof that the plan works.

Which to pick

A practical rule:

• If the spread in interest rates is large — a dozen percentage points between the most and least expensive — avalanche wins and the gap is too big to ignore.
• If the rates are close together, avalanche gains little while snowball delivers quick closures. Then the choice is obvious.
• If you have already abandoned a payoff plan once, pick snowball regardless of the arithmetic. A method you stick to beats an optimal one you do not follow.

A third way

Nothing stops you starting with snowball and switching to avalanche. Close one or two of the smallest debts to see the effect, then reorder by interest rate.

You give up some of the savings and gain a real chance the plan survives its first six months.

What neither method fixes

Both assume you are not taking on new debt. Overpaying a credit card you keep using is pouring water into a bucket with a hole — the balance returns, and the interest with it.

Before choosing a method, spend a month writing down where the money actually goes. Very often the surplus available for overpayment turns out to be larger than you thought — or non-existent, in which case the order of repayment is not the problem.