Consider Your Debt Situation

If you only have one source of debt, you don’t need a “debt payoff method.” All you need to do is make the largest payment you can – usually one or two times per month – until the debt is fully paid off.

However, when you have multiple sources of debt, choosing a payoff method and making a plan will likely reduce the time it takes to eliminate your debt. It’s also likely to reduce the total amount you end up paying in interest.

(Whether you have one or multiple sources of debt, you may also consider moving that debt to a new lender that offers a lower interest rate. This can save you money. Learn more about credit card debt consolidation here and add that task to your list (logged in users only) if it’s something that is right for you.)

Payoff Methods

The two payoff methods are commonly known as the Avalanche Method and the Snowball Method. The Avalanche Method prioritizes your maximum payment to whatever source of debt has the highest interest rate. The Snowball Method prioritizes your maximum payment to whatever source of debt has the lowest balance. (In both methods you must always pay the minimum payment due, on time, every month, to every source of debt.)

Example

Imagine you have the following sources of debt:

Source of Debt	Interest Rate	Balance	Note
Credit Card	21%	$6,000	Credit card debt almost always has double-digit interest rates. If you have multiple, unconsolidated credit card debts, compare the interest rates and the total balances.
Student Loan	8%	$32,000	If you have multiple, unconsolidated student loans compare the interest rates and total balances.
Auto Loan	5%	$15,000
Personal Loan	3%	$3,000

Avalanche Method

Using the Avalanche Method, here’s how you’d pay it off:

Priority	Source	Interest Rate	Note
1	Credit Card	21%	You’re paying this off first because it has the highest interest rate. Reducing this debt will lower the total amount you pay in interest over the life of the debt.
2	Student Loan	8%	Make the minimum payments on this until the Credit Card debt is fully paid off. Then maximize this payment.
3	Auto Loan	5%	Make the minimum payments on this until the Student Loan is fully paid off. Then maximize this payment.
4	Personal Loan	3%	Make the minimum payments on this until your Auto Loan is fully paid off. Then maximize this payment.

Snowball Method

Alternatively, using the Snowball Method, here’s how you’d pay it off:

Priority	Source	Balance	Note
1	Personal Loan	$3,000	You’re not paying much in interest on this because the rate is low and the balance is low. However, knocking this debt out completely can feel great and allow you to focus 100% of your attention on your other debts more quickly.
2	Credit Card	$6,000	Make the minimum payments on this until the Personal Loan is fully paid off. Then maximize this payment.
3	Auto Loan	$15,000	Make the minimum payments on this until the Credit Card debt is fully paid off. Then maximize this payment.
4	Student Loan	$32,000	Make the minimum payments on this until your Auto Loan is fully paid off. Then maximize this payment.

How to Choose

As a general rule, we recommend the Avalanche Method because mathematically, it is the fastest way to pay off all the debt and you’ll pay the least amount in interest.

However, if you have a few sources of debt you can pay off completely in just a few months due to their low balances, it probably isn’t going to make much of a difference in the total interest you pay if you knock those out and then focus on the other debt.

What really matters is that when you pay off one source of debt completely, you take all that you were paying toward that and put it toward your next source of debt. If you truly maximize your payments you will make great progress regardless of the method you choose.

Take Action

Write down all your sources of debt in the order you plan to pay them off in the notes section above and track the balances in your Assets and Liabilities dashboard (available to logged in users).