Insights · Letter No. 5 · Foundations
Paying off debt: avalanche, snowball, and calm
Expensive debt is compounding in reverse. Two proven methods for getting out, and how to choose between them.
Debt is not all alike. A low fixed-rate mortgage on a home you live in is very different from a credit card balance charging more than 20% a year. The second kind works against you every month, and paying it off delivers a return as certain as anything in finance: the interest you no longer pay.
Know what you owe
List every debt with four numbers: balance, interest rate (APR), minimum payment, and due date. Federal Reserve data show average credit card interest rates have been above 20% in recent years. Seeing every number in one place is often the moment a plan becomes real.
The avalanche method
Pay the minimum on everything, then put every extra dollar toward the debt with the highest interest rate. When it is gone, roll that payment to the next-highest rate. Mathematically, this minimizes total interest paid.
The snowball method
Pay the minimum on everything, then put every extra dollar toward the smallest balance, regardless of rate. Each paid-off account frees up a payment and delivers a visible win. It can cost a little more in interest, but research on consumer behavior suggests the sense of progress helps many people stick with the plan.
Which one?
The best method is the one you will follow. If your rates are far apart, the avalanche usually saves meaningful money. If you need momentum, or your balances are similar in rate, the snowball is a perfectly good choice. Either beats paying minimums.
Habits that help
- Stop adding to the pile. Pause card use while you pay down balances.
- Automate at least the minimums so a late fee never compounds the problem.
- Keep a small cushion. Even $1,000 in savings prevents new debt when something breaks.
- Ask about a lower rate. Card issuers sometimes reduce rates for customers with a solid payment history. Read balance-transfer and consolidation offers carefully, including fees and when promotional rates end.
- Beware "debt relief" promises. The CFPB and FTC warn about companies that charge upfront fees or promise to erase debt.
Once high-interest debt is gone, the payment you were making becomes your most powerful savings habit. Point it at your emergency fund, then your long-term investments.
This letter is general education, not a recommendation to buy or sell any security. Consider your own situation, and a licensed professional, before making financial decisions.