Quick Answer: Should I use the debt snowball or debt avalanche method? Both methods are effective: the Avalanche method minimizes interest by targeting highest rates first, while the Snowball method builds psychological momentum by paying off smallest balances first. For a 10,000 credit card debt at 18%, adding just 100 extra per month can shave years off your payoff timeline and save thousands in interest.
Worked Scenario: Scenario: The Credit Card Squeeze
An individual has 10,000 in credit card debt with an 18% APR. Their minimum payment is 250.
Scenario Inputs
- Total Balance: $10,000
- Interest Rate (APR): 18%
- Minimum Payment: $250
- Extra Payment: $100
Outcome: By paying only the minimum, it would take over 5 years and cost 5,400 in interest. By adding 100 extra per month, the debt is cleared in 3 years, saving $2,300 in interest charges.
Formula and Methodology
B_new = B_old + (B_old * r) - P
Variables
- B: Principal balance
- r: Monthly interest rate (APR/12)
- P: Total monthly payment
Assumptions
- Interest is calculated monthly on the remaining balance.
- The annual interest rate (APR) remains constant.
- No additional charges or fees are added to the balance.
- Payments are made on time every month.
Limitations
- Does not account for 'teaser' or introductory 0% APR rates.
- Variable interest rates on credit cards can change monthly.
- Missed payments often trigger penalty rates not modeled here.
Practical FAQs
What is the Debt Avalanche method?
The Avalanche method focuses on paying off the debt with the highest interest rate first, regardless of the balance size. This is mathematically the fastest way to pay off debt.
What is the Debt Snowball method?
The Snowball method focuses on paying off the smallest debt balances first to provide quick 'wins' and build motivation, even if they have lower interest rates.
Will paying $100 extra really help?
Yes. On high-interest debt like credit cards, extra payments go directly toward the principal, which reduces the base for future interest calculations, creating a compounding benefit for YOU instead of the bank.