If you’re interested in debt reduction strategies, you’re not alone. Many households are dealing with increased financial stress. According to the Federal Reserve Bank of New York, credit balances rose by $24 billion to $1.17 trillion from the second to third quarter of 2024, and auto loan balances increased by $18 billion to $1.64 trillion over the same period.^* It’s no secret that paying down debt isn’t easy, but choosing a strategy will help you along the way. Here’s what you need to know about the debt snowball method and the debt avalanche approach.

The Debt Snowball Method

Imagine a snowball gaining momentum as it rolls downhill, slowly getting larger along the way. That’s the idea behind the debt snowball method. This method isn’t really about numbers. It’s about psychology. Tackling smaller debts first provides quick wins, boosting your motivation to tackle the larger ones.

Here’s how the debt snowball works:

• List all your debts from the smallest to the largest balance, regardless of interest rates.
• Focus on paying off the smallest debt completely (while making minimum payments on the others).
• Feel your motivation grow as you reach payoff milestones, with each zero balance providing a feeling of accomplishment.

Is there a downside? Compared to other strategies, the debt snowball method might not always provide you with the largest cost savings in the long run since it doesn’t account for interest rates. However, the mental boost can be a game-changer on the journey to becoming debt-free.

The Debt Avalanche Approach

If you’re already highly motivated to get out of debt and want to reduce your total interest, check out the debt avalanche approach. This popular debt reduction strategy prioritizes efficiency and cost savings. Instead of focusing on eliminating individual debts to build quick wins, the debt avalanche approach prioritizes minimizing interest by tackling the highest rates first.

Here’s how the debt avalanche works:

• List your debts in order from the highest to the lowest interest rates.
• Channel your resources toward paying off the debt with the highest interest rate first (while making minimum payments on the others).
• Once you eliminate the highest-interest debt, move on to the next one in line until you’ve reached zero balances on all debts.

By targeting high-interest debts first, you minimize the overall interest you’ll pay. While it might take longer to see that “paid in full” status on the smaller debts, you’re strategically chipping away at the financial burden that’s costing you the most. It’s like climbing a mountain — the path might be steep, but the view from the top is worth it.

Debt Reduction Strategies

Ready to start paying down debt? Consider the motivation-boosting debt snowball method or the cost-saving debt avalanche approach. Some people even combine elements of both methods to create a customized strategy. Remember, the key is progress, not perfection. Whichever method you choose, just by getting started, you’ll be one step closer to a debt-free future.

Sick of high-interest debt? Consider the benefits of a debt consolidation refinance or balance transfer.

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