Dealing with debt can be a major challenge. Adopting the right strategy can make it a lot easier. The two main strategies for dealing with debt are usually called avalanching and snowballing. Here is a quick guide to them and how they compare so you can choose which is right for you.
Avalanching
With the avalanching strategy, you start with the most expensive debt. Once you’ve paid this off, you move on to the next most expensive debt and so on.
Snowballing
With the snowballing strategy, you start with the smallest debt. Once you’ve paid this off, you move on to the next smallest debt and so on.
Please note, with both methods, you continue to make the minimum payments on all other debts.
Avalanching and snowballing compared
Here is a quick guide to how avalanching and snowballing compare against each other.
The maths
This one is very difficult. Technically, avalanching should be the most economical approach. This is because it pays off the most expensive debt first. In reality, there are two potential complications.
Firstly, the cost of a debt is determined by a combination of the interest rate and the amount owed. As you pay down a debt, you will reduce the amount owed. This means that there is very likely to come a point when the debt ceases to be the most expensive debt.
If you carry on paying it off, you will actually be reducing the value you get from your overpayments. On the other hand, if you switch to paying down another debt, you could end up getting yourself in a complicated and frustrating tangle with your sums.
Secondly, using the avalanching approach means that you’ll probably find yourself tackling larger debts before smaller ones. This means that your smaller debts will remain against your name for longer. There is a good chance that this will result in a hit to your credit record. This could make it harder for you to get the best deal on your debts.
The management
Going down the snowballing route can make it easier for you to manage your money. You’ll pay a debt and then close the product formally. That means, as you go along, you’ll have fewer and fewer products to manage.
The headline benefit to this is that it makes your finances easier to manage. This makes it less likely that you’ll derail your progress with issues such as accidental late payments.
Another key benefit is that it means your credit record can improve much faster than with avalanching. Formally closing credit products sends a clear signal that you are done with them.
One final point is that closing products starts the countdown for your data being deleted from the provider’s system. The sooner your data is deleted, the sooner it ceases to be at risk from data compromise.
For clarity, financial services providers do exercise the highest levels of data security. Apart from anything else, they are legally obliged to do so. As always, however, there are no guarantees.
The motivation
This is very much individual. With that said, for many people, the snowball method can be easier to handle psychologically. You get the benefit of early, relatively easy, wins. By the time you come to tackle larger debts, you know that you are on the home straight.
Additionally, you’ll have had a bit more experience in managing your money. For example, you should at least be getting into the swing of budgeting effectively. You’ll also have had longer to get used to your situation as someone who is dealing with debt. For example, you’ll have decided who needs to know what about it and informed them.
