Debt payoff calculator: snowball vs avalanche

How the debt snowball and avalanche methods work

The CFPB has tools for paying down debt that cover both ideas. Its debt action plan says that when your budget has money left after the minimums, there are two basic ways to use it: start with the smallest debts, or start with the ones that charge the highest interest. It says neither is better than the other, and to pick the one that keeps you most motivated.

• Snowball, smallest balance first. The CFPB's reducing debt worksheet calls this the snowball method. You target the smallest debt, and once it is gone you point the same payment at the next smallest, building “a snowball of debt payments.” Its pro: with many small debts you may see progress quickly. Its con: the total cost can end up higher, since the most expensive debt isn't necessarily the first to go.
• Avalanche, highest rate first. The CFPB calls this the highest interest rate method. You aim at the debt charging the most interest, since it costs you the most. The worksheet words this for unsecured debt, such as credit cards. Its pro: over the long run it can save money. Its con: if that debt is a big one, the progress may feel slow.

Both keep every minimum payment going. That is the part people skip, so the calculator does it for you. When a debt is paid off, its minimum doesn't go back to your spending. It rolls into the next debt, so the total you pay each month stays the same.

Snowball vs avalanche at a glance

How to use the calculator

1. List every debt. Balance, APR and minimum payment, from your latest statements.
2. Set the extra. What you can add each month on top of the minimums, after bills and saving. If you are unsure, look at what is left in your budget and in how much of your paycheck to save.
3. Read the two plans. Compare the debt-free month and the interest, then pick the one you will keep doing.
4. Redo it when something changes. A raise, a new charge or a new rate changes the numbers, so run it again.

Building a cushion alongside debt is a separate question; see the emergency fund guide.

A worked example, with both methods

Three made-up debts and $200 extra a month, so $670 goes out in total every month. These are the calculator's starting numbers, and this page uses the same code, so the table matches what you see above.

Here is Credit card A month one, by hand. $6,000 at 24% a year is 2% a month, so $120.00 of interest is added. Under the avalanche it gets its $180 minimum plus the $200 extra, $380 in all. What's left is $5,740.00.

The snowball sends the extra to Credit card B first, since $1,500 is the smallest balance, and clears it in month 7. The avalanche aims at Credit card A first, because 24% is the highest rate. The Car loan at 6% comes last under both. Both methods finish in the same month here, because the same money goes out every month. The difference is the interest along the way.

What a bigger payment does to one debt

One made-up card: $5,000 at 24% APR. The only thing that changes is the monthly payment. At $100 a month, the payment equals the month's interest ($5,000 × 24% ÷ 12), so the balance never goes down.

How credit card interest works

The CFPB describes the APR, or annual percentage rate, as the standard way to compare what loans cost. On a card, it says many companies work out the interest daily from your average daily balance, and the daily charge is called the daily periodic rate. Where a card uses one, interest compounds daily. Your statement has to list each type of balance that carries its own APR, and how much sits in each.

This calculator simplifies that. It adds one month of interest at the APR divided by 12, then takes your payment off, so its numbers are close but won't match a card statement to the cent. A rough check you can do yourself: balance times APR divided by 12 is about one month of interest. If your minimum is close to that number, almost all of it goes to interest.

Your statement also tells you where you stand. The CFPB says card issuers must show how long it would take to pay off your balance if you add no charges and pay only the minimum each month, and what monthly payment would clear it in 36 months. You don't have to pay more than the minimum. The CFPB adds that paying only the minimum could take years, and that paying more each month means less interest over time. The minimum-only row in the example above is the same idea for three debts: 4 years 7 months and $5,947 of interest, against 2 years 10 months and $2,852 with the extra.

If you pay down debt as a couple

Start with a list that says whose debt each one is: whose name is on the account, who runs up the balance, and whether it came before the relationship. Put it in the calculator once for each person, or all together, whichever matches how you plan to pay. Knowing which debt belongs to which of you is a fact to read off your statements, and the talk comes after. If you're still working out how to organize the rest of your money, our guide to combining finances after marriage goes through the common setups.

Paying one person's debt from shared money is a choice the two of you make, with a few common ways to do it:

• Each pays their own. Each person's extra comes from their own money. It is simple, and the person with the smaller paycheck has less to throw at it.
• Share the extra by income. The shared pot pays the extra in proportion to what each of you earns. Our fair split calculator works out the shares.
• The shared pot pays one list. You treat every debt as the household's and aim the extra at the best target, then agree out loud that it was shared.

Whichever you pick, write down what the shared money paid toward one person's debt, so neither of you is guessing later. See also budgeting for couples.