With interest rates fluctuating – a situation unlikely to change any time in the near future – and the global financial picture far from settled, the idea of rolling debts over for years on end is fast coming to an end. Even those who traditionally relied on credit – and we’re thinking here particularly of the younger generations – are now thinking in terms of paying off debts in order to build a more financially stable debt-free future. 

So read on for how you can best pay off your debts and which method is best for you. The two most popular debt payoff methods – avalanche and snowball – are designed to achieve the same goal. They both offer freedom from debt – but using slightly different strategies. Deciding between the two methods depends on your financial situation and your personality. For a cautious saver, the debt avalanche method is a wise choice. However, someone highly motivated to achieve fast results would do better with the debt snowball.

The Snowball Method

This involves paying off your smallest debts first, regardless of whether the interest rate is higher than your other debts, while still making minimum payments on larger debts. Once the smallest debt is paid off you roll the amount you were paying onto the next smallest debt.This method can provide motivation as you see the number of your debts gradually disappearing.

Pros and Cons of the Snowball Method For Debt Free Living

Pros:

• The quick win of the disappearing debt gives you a boost and encouragement.

• Easy to manage your debts according to balance rather than by interest rate.

Cons:

• You won’t be saving on interest payments initially.

• It may take longer to become debt free with this method

How Does The Snowball Method Work?

Example:

Imagine someone had a combined debt of £28,500, which was spread across various loans and credit cards:

Snowball Method – Step by Step

1. List Debts – Smallest to Largest (irrespective of interest rates)
   • Credit Card A
   • Personal Loan 2
   • Credit Card B
   • Personal Loan 1
2. Make Minimum Payments – On all cards but the smallest balance (Credit Card A).
3. Make An Extra Payment on Smallest Debt – Pay £400 extra each month towards Credit Card A, putting £500 towards this debt each month.
4. Repeat Until Debt-Free – As each debt is paid off, snowball the money into the next smallest debt.

Projected Timeline:

• Credit Card A would be paid off in 10 months.
• Personal Loan 2 would be paid off in 12 months (with the £500 from Credit Card A added to the minimum payment).
• Credit Card B would be paid off in 18 months (with the £500 from the previous two debts added).
• Personal Loan 1 would be paid off in 24 months (with the full £900 from the previous debts added).

The Avalanche Method

This involves paying off debts which have the highest interest rates first while still making minimum payments on your lower-interest debts. This approach can save you money in the long run because you will be targeting debts with the highest costs but it may take longer for you to see real progress. As with the snowball method, once you have eliminated the debt with the highest interest rate you can move on to the one with next highest interest rate.

If you don’t need the security or motivation of seeing debts disappear quickly and are content just to know that they are going down the avalanche method may be for you.

Pros and Cons of the Avalanche Method

Pros:

• With the interest you save you will see the benefit as your finances stabilise.
• While this may be a slower way to pay off debts you will have the peace of mind in knowing that this option will mean your savings accounts build over time.

Cons:

• If it takes a long time to pay off your first debt you may find it hard to stay motivated.
• Other factors such as variable interest rates may come into play which could impact how quickly you can pay off the debts.

Avalanche Method – Step by Step

Imagine the same debts as in the other example:

• Credit Card 1 – £5,000 balance with an interest rate of 18% APR
• Credit Card 2 – £8,000 balance with an interest rate of 15% APR
• Personal Loan 1 – £10,000 balance with an interest rate of 8% APR
• Personal Loan 2 – £5,500 balance with an interest rate of 5% APR

The minimum payments add up to £600, as per before.

1. List Debts – Highest to Lowest Interest Rate

• Credit Card A (18%)
• Credit Card B (15%)
• Personal Loan 1 (8%)
• Personal Loan 2 (5%)

2. Make Minimum Payments – on all but the debt with the highest interest rate. (Credit Card A).

3. Make An Extra Payment on the debt with the highest interest. Pay an additional £400 each month to paying off Credit Card A; a total of £500 towards this debt.

4. Repeat Until Debt-Free – As each debt is paid off, avalanche the extra payment amount onto the debt with the next highest interest. Continue until all debts are cleared.

Ultimately, deciding which method is better for you comes down to your ability to maintain discipline in your repayment plans and what will best motivate you – saving money or getting rid of your debts.

Additional Tips When Becoming Debt-Free

• Consolidate your debts – If you can, combine multiple debts into one loan with a lower interest rate. This can simplify your payments and save you paying too much interest.
• Refinance your loans – See if you can obtain lower interest rates to reduce your monthly payments.
• Look for a balance transfer credit card – You may be able to transfer high-interest debt to a card with a 0% introductory APR. This will help you to save on interest while you pay off the balance.
• Seek professional help – If you feel like your debts are insurmountable, don’t hesitate to seek help from a financial advisor or debt management charity; they‘re here to help.