Which Debt Payoff Plan Is Best?

According to a new study by the Century Foundation, approximately 111 million Americans are unable to pay off their credit card bills each month. That’s half of all Americans with a credit card, and 40% of all adults!

Credit card debt can be exceptionally challenging to manage because it often compounds at high interest rates and is typically utilized for consumer spending rather than appreciating assets (unlike a mortgage). Since January 2025, Americans have paid $240.7 billion (with a “b”) in credit card interest charges. And credit card interest rates are sitting at an all-time high.

Austin Kilgore, an analyst with the Achieve Center for Consumer Insights at Achieve, says, “There is no one-size-fits-all answer to debt. Consumers should consider their unique financial circumstances, goals and spending patterns when determining the best way to pay down debt and improve their financial health.”

It’s no wonder that many Americans feel like they are drowning in debt without a lifeline. There are two popular debt retirement strategies, however, that have worked for people and are worth considering if you are ready to get down to business and address your debt: the snowball and the avalanche methods.

Michael McAuliffe, CEO and president at Family Credit Management, says, “Getting out of debt is not just about math, it’s about motivation and behavior. Like any major goal in life, people need encouragement along the way. You don’t earn a college degree after one semester, and you don’t lose weight after a week of dieting.” 

If you’re not mentally ready to tackle your debts, you won’t succeed no matter what method you use. The one thing that will make you successful is knowing what motivates you.

For some people, knowing how much money they can save over time by reducing high-interest debt  lights a fire in their soul. This is where the Avalanche method comes in.

With the avalanche method you pay off your highest interest-rate debt first. Credit cards are usually in this category, though payday loans, car title loans and high-interest installment loans also come with punishingly high interest rates.

The snowball method, on the other hand, uses the power of quick wins to keep you going, even when the going gets tough. If you have several small accounts — like two, three or five store credit cards — you get a mental boost from paying them off and scratching them off your list.

The debt avalanche method is a repayment strategy in which you make minimum payments on your accounts while putting extra funds toward the balance with the highest interest rate. Once that most expensive debt is fully paid off, you roll those payments into the next-highest interest debt until all balances are eliminated.

The logic behind the avalanche method is the savings you get from not paying interest at the highest rate.

As an example, imagine you have three debts with three different interest rates: a credit card with $5,000 at 22%, a personal loan with $5,000 at 12%, and a car loan for $20,000 at 6.5%.

Your total annual interest across three debts amounts to $3,000, consisting of $1,100 on the credit card ($5,000 at 22%), $600 on the personal loan ($5,000 at 12%), and $1,300 on the car loan ($20,000 at 6.5%). 

By paying $200 per month on each loan ($150 minimum plus $50 extra), you could resolve these three specific debts in an estimated 145 months, based on this theoretical example, paying a combined total of $11,416.25 in accumulated interest.

But using the Avalanche method, you would make the minimum payments on your other loans while dedicating the extra money to the highest interest loan — the credit card. 

By strategically shifting your fixed $600 monthly budget and allocating $300 to the credit card, $150 to the personal loan, and $150 to the car loan, the total estimated interest across these accounts could drop from $11,416.25 down to $6,579.53, and the projected timeline could decrease from 145 months to 61 months.

Once the credit card is paid off, you roll over the $300 you paid toward the credit card into the $150 personal loan payment while still paying $150 per month on your car loan. Not only do you pay less interest using this method, but you also pay off your loans faster.

The downside to this method is the financial discipline it requires. In the example just given, you will still be toiling away at your payments for all three debts for at least eighteen months.

If you start charging purchases on your credit card again because your austerity budget has frayed your nerves, you will soon find yourself neck deep in debt again.

The Snowball method prioritizes paying off your smallest debt balances first while maintaining minimum payments on the rest. Once a small debt is fully paid, you roll its monthly payment amount into targeting the next smallest balance, creating momentum like a rolling snowball.

This works best when you have several smaller debts you want to retire to psych yourself up to tackle the bigger debts.

Let’s say you have a credit card with $1,000 on it at 22%, one store credit card with $100 on it at 30%, a personal loan for $750 at 12% and a car loan for $20,000 at 6%, and you have $400 each month for all the bills.

With the snowball method, the interest rates aren’t as important as the size of the debts. You start with the store credit card because it has the smallest balance — $100 — and work to pay it down while continuing to make minimum payments on the other debts.

After the store credit card is paid off, allocate those extra funds  you used to pay it down toward the personal loan, which is the next smallest debt, again while continuing to make minimum payments on your credit card and car loan.

In the first month, you have zeroed out one quarter of your named debts, and in just three more months, you have paid off the other one. Though your car payment is by far your biggest obligation, once you have paid off all your other debts, you can either focus on paying that one off early, or put the extra money into a savings or investment account.

For these specific smaller balances, mathematically choosing the avalanche method would only save you about $40 in interest. Because the financial savings are so small in this scenario, the massive psychological benefit of a quick win and “getting the ball rolling” makes the snowball method the clear winner here.

There are other ways to address your financial liabilities. A debt consolidation loan involves taking out a single personal loan from a bank to resolve high-interest credit card balances  and smaller debts together.

According to Kilgore, “If you have credit card and other high-interest debt, a personal loan may offer a lower interest rate, depending on your qualifications. If you can secure a rate that is substantially lower than the rates on your existing debt, you can use the loan funds to pay off those balances and replace multiple high-interest payments with a single loan payment at a lower rate.” 

Achieve also offers home equity loans and home equity lines of credit (HELOCs) to help debtors finance loan consolidation.

Under the right circumstances, a balance transfer card is useful if most of your high-interest debt is on credit cards. By transferring your high-interest debt to one of these cards, you can temporarily halt interest accumulation on the transferred balance, allowing more  of your payment to directly chip away at the principal. 

However, this strategy is not without its pitfalls. Ashley Morgan, a bankruptcy and tax attorney in Northern Virginia, warns, “people commonly underestimate balance transfer fees, deferred interest risks, and how aggressively they need to pay down the balance before the promotional period expires.”

The key is to keep your eyes on the prize. Not only being free from high-interest debt but being able to put money away as savings can help alleviate financial stress and assist you in working toward long-term financial stability. Sometimes getting yourself in the right mindset is difficult — but very worth it.

FAQ

Which is better, the debt snowball or debt avalanche?

Mathematically, the debt avalanche method is always better because it targets the highest interest rates first, saving you the most money on interest and typically helping you become debt-free faster. However, psychologically, studies show the debt snowball method is often more successful for everyday consumers. The psychological boost of completely wiping out smaller balances quickly provides the motivation needed to stay on track and not give up.

Does Dave Ramsey recommend debt snowball?

Yes, the debt snowball is a core pillar of Dave Ramsey’s personal finance philosophy and is formally known as “Baby Step 2” in his 7 Baby Steps plan. The method is highly psychological, prioritizing behavior modification and motivation over pure mathematical savings.

Should you pay off your mortgage before you retire?

Deciding whether to pay off your mortgage before retirement depends on your specific financial goals, liquidity needs, and interest rates. While entering retirement without a mortgage lowers your baseline expenses, it can deplete cash reserves that might otherwise yield higher returns.