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Taking credit has never been so easy, whereas paying that off is just as tricky. Being in debt is one of the most challenging times for any individual. This article will give us an understanding of the two popular techniques to pay off debts.
On discussing the two approaches, namely Debt Avalanche and Debt snowball, you can decide which method will significantly impact clearing off your debt. It will save you from tons of opposite counseling from the crowd.
In both the techniques following are some list you should consider before implementation
- Pen down your exact list of debt.
- Know your income in hand.
- How much money can you share out to clear your debt?
Debt Avalanche
Prominent Debt counselors and financial planners recommend Debt Avalanche. It is known as the most desirable technique to clear off your debt. Once you have your list ready, this technique directs you to pay your debt with the highest interest rate to the minimum interest rate.
The concept of Debt Avalanche is to rank your interest rate from the highest to the lowest. Then, clearing off the debt accordingly (highest to lowest). It will decrease the risk factor and save your repaying time and money.
The example illustrated below will help you in better understanding Debt Avalanche.
Suppose a particular individual has the following credit outstanding amounts:
- Personal loan – $3000 at 7% interest
- Credit card Debt – $5000 at 17% interest
- Auto loan – $7000 at 5% interest
According to the Debt Avalanche method, you will first pay off the Debt with the highest interest rate: the credit card debt. Once you clear the debt with the highest interest rate that takes a large chunk of your monthly repayment, it becomes easier to pay the debts with lower interest rates.
Thus, prioritizing your credit from highest interest rate to lowest becomes an efficient method mathematically that saves you maximum money. It will also decrease the duration for paying off your debt and simulate the feeling of achievement with it.
It is always a human tendency to avoid more significant debt first and start paying off with a smaller amount. Debt avalanche requires a religious practice and dedication to pull off unseen expenses for daily life maintenance. It becomes a disadvantage for some people.
Debt Snowball
As said earlier, after sorting your list to consider before clearing off the debt, this is another method you can consider.
The Debt Snowball is reciprocal to the Debt Avalanche. In this technique, you pay off the debt ranking from lowest interest rate to highest interest rate. In comparison, this technique costs a higher total interest rate than that of Debt Avalanche. Clearing off the debt from smallest to next smallest gives the creditors an impression of getting rid of their debts in no time.
Financial counselor Dave Ramsey has publicized this technique and firmly believes that it works in the most suitable way to pay off your debts in a short duration.
The table below may provide you with a more in-depth understanding between the Debt Avalanche and Debt Snowball technique.
| Debt Avalanche | Debt Snowball |
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Which technique should you choose?
The above techniques will only give you a broader perspective on how each strategy will work. In the end, it is always up to an individual to select the best method that will be for him to clear off the debt.
If one technique works well for one, it is not necessarily required to be the other’s best option. It always depends on how you plan and execute either of the techniques.
Both the techniques apply not only to credit card outstanding amounts but also on all kinds of debt like a house loan, car repair loans, education loan, etc. One should be more focused on being a responsible spender and a saver when it comes to your hard-earned money.