How To Pay Off Debt With The Debt Snowball and Debt Avalanche

How To Crush Debt | Credit Card Debt | Pay Down Debt

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Do you have questions about how to pay off debt faster? Did you know that paying an extra $20 towards your credit card’s minimum payment can effectively wipe out years of repayment for credit card balances of $3,000 or higher?

Sometimes debt can work in our favor, such as when we buy a house. But other times, debt can pile up, and we feel stuck. Have you ever had a large debt, such as a credit card debt or student loans, that felt like they weren’t going away any time soon?

Fortunately, there’s methods to help reduce how long it will take to pay off your debt. In this article, I’m going to go over common ways to get out of debt faster and answer frequently asked questions about debt. 

Two Effective Methods To Paying Off Debt

The debt avalanche method and the debt snowball method are two effective ways to pay off debt. Both methods have pros and cons, but in the end, both methods will help you pay off debt more efficiently so that you can one day become debt-free.

How To Pay Off Debt With The Debt Avalanche Method

The debt avalanche method can be best described as the method that saves you the most money when compared to the debt snowball method. The following steps are taken to do the debt avalanche method:

  • Pay the minimum payment of each of your debts
  • With any extra money you have leftover at the end of the month, pay an additional payment to your debt which has the highest interest rate
  • When the debt with the highest interest rate is paid off, apply a payment to the next debt with the highest interest rate, and so on.

Let’s use an example with simple numbers to demonstrate.

Assume you have the following debts:

  • An auto loan with a balance of $10,000, an interest rate of 4%, and a minimum payment of $300
  • A credit card with a balance of $2,000, an interest rate of 15%, and a minimum payment of $35
  • A personal loan with a balance of $5,000, an interest rate of 8%, and a minimum payment of $150
  • A student loan with a balance of $8,000, an interest rate of 6%, and a minimum payment of $100

From a quick glance, you can see that the highest interest rate debt is the credit card. Let’s assume you have $200 left over at the end of the month from your typical monthly expenses. Here are the steps you would take to start the debt avalanche.

  • Pay the minimum payment to each the auto loan, credit card, personal loan, and auto loan.
  • Take your extra $200 that you have left over and apply it to your credit card since that is your highest interest rate debt.

Let’s assume several months go by and you pay off your credit card. Here’s what you would do next.

  • Pay the minimum payment to each remaining debt – the auto loan, the personal loan, and the student loan.
  • Take your extra $200 plus the $35 you’re no longer paying toward the credit card, or $235 in total, and apply it towards the personal loan, which is your next highest interest rate debt.

When your personal loan is paid off, you would then pay the extra $200, plus the $35 leftover from the credit card, plus $150 leftover from the personal loan, or $385, and apply that towards your student loan. You would repeat this process until all debts are paid off.

How To Pay Off Debt With The Debt Snowball Method

The debt snowball method can be best described as the method that gives you the fastest wins when compared to the debt avalanche method. The following steps are taken to do the debt snowball method:

  • Pay the minimum payment of each of your debts
  • With any extra money you have leftover at the end of the month, pay an additional payment to your debt which has the lowest current balance
  • When the debt with the lowest current balance is paid off, apply a payment to the next debt with the lowest balance, and so on.

Let’s use an example with simple numbers to demonstrate.

Assume you have the following debts:

  • An auto loan with a balance of $10,000, an interest rate of 4%, and a minimum payment of $300
  • A credit card with a balance of $5,000, an interest rate of 15%, and a minimum payment of $35
  • A personal loan with a balance of $2,000, an interest rate of 8%, and a minimum payment of $150
  • A student loan with a balance of $4,000, an interest rate of 6%, and a minimum payment of $100

From a quick glance, you can see that the smallest balance debt is the personal loan. Let’s assume you have $200 left over at the end of the month from your typical monthly expenses. Here are the steps you would take to start the debt snowball.

  • Pay the minimum payment to each the auto loan, credit card, personal loan, and auto loan.
  • Take your extra $200 that you have left over and apply it to your personal loan since that is your lowest balance debt.

Let’s assume several months go by and you pay off your personal loan. Here’s what you would do next.

  • Pay the minimum payment to each remaining debt – the auto loan, the credit card, and the student loan.
  • Take your extra $200 plus the $100 you’re no longer paying toward the student loan, or $300 in total, and apply it towards the student loan, which is your next lowest balance debt.

When your student loan is paid off, you would then pay the extra $200, plus the $150 leftover from the personal loan, plus $100 leftover from the student loan, or $450, and apply that towards your credit card. You would repeat this process until all debts are paid off.

How Much Paying $20 Extra Towards the Minimum Payment of a Credit Card Can Save You

To demonstrate how important paying extra money towards your minimum payment is, I’m going to provide an example using a situation many Americans are in – paying off a credit card.

We’re going to assume a $5,000 credit card balance with a 15% interest rate. 

For a typical credit card, you would take just over 13 years to pay off this balance if you only paid the minimum monthly payment. You would pay a total of $2,961.24 in interest as well.

credit card debt payoff $5,000 at a 15% interest rate takes 13.17 years and $2961.24 paid in interest

Now the question is, how much money would you save if you paid an additional $20 each month towards your credit card minimum monthly payment? $20 is just $5 a week extra that you need to come up with. Will it make a difference?

The answer is, yes, paying an extra $20 each month will make a significant difference. 

When you pay just an extra $20 each month, you end up paying the credit card off in just over 7 years, saving you 6 years of repayment. You also only pay $2,008.73 in interest or just over $950 less in interest payments. 

credit card debt payoff $5,000 at a 15% interest rate takes 7.08 years and $2008.73 paid in interest when an extra $20 is applied each month

It’s amazing how even $20, which is less than $1 per day, can save you loads of money each month when paying off high interest debt like a credit card.

Frequently Asked Questions about Debt

With debt being so common in America, it makes sense that there are a lot of questions about it. Here are some answers to some common questions about debt.

What Percentage of America Is In Debt?

According to ShiftProcessing.com, in 2020, 80% of Americans had consumer debt with an average debt of $38,000, not including mortgage debt. Debt is a way of life for many Americans, as all Americans’ collective debt tops $14 Trillion. This debt is a collective sum of mortgage debt, student loans, auto loans, credit card debt, and medical expenses mainly.

What are secured and unsecured debts?

Secured debts are debts that have collateral behind them that the lender can collect on if the borrower doesn’t pay. A mortgage is a secured debt because if the borrower doesn’t pay, the lender can take possession of the home.

With unsecured debts, the lender lends to a borrower solely based on their credit trustworthiness and their promise to repay their debts. A credit card is an example of an unsecured debt.

Secured debt generally has a lower interest rate than unsecured debt because the lender has less risk associated with recovering their money should the borrower be unable to pay. That is, when a borrower has collateral to put up for a loan, the borrower will pay a lower interest rate on their loan. This is why mortgages and auto loans often have interest rates below 7% and credit cards, which are unsecured debts, often have interest rates above 15%.

What are examples of secured debt?

Two of the most common examples of secured debt are mortgages and auto loans. With both mortgages and auto loans, the borrower has an asset that they owe money on that the lender can seize if the borrower stops paying their loan.

For example, if you finance a car and stop paying your auto loan, the lender can repossess your car from you.

What are examples of unsecured debts?

Credit cards, student loans, and most personal loans are examples of unsecured debts because there is no collateral on the debts. These sources give an advance of money to a borrower without the borrower providing anything in return except a promise to pay back the debt.

What is the Difference Between Good Debt and Bad Debt?

Generally speaking, good debt is debt that helps you build more wealth or more income in the future. Examples of that include:

  • A mortgage, which buys you your house that will appreciate over time
  • Student loans, which gives you access to higher education to increase your income
  • Business loans, which allows you to build a business that, when successful, will bring you income and wealth

Bad debt, however, is debt that does not generally help you build wealth or income. This can include:

  • Credit cards, which have interest rates so high that the debt actually can prevent you from building wealth
  • Personal loans, which often also have high interest rates and can limit your wealth-building potential
  • Auto loans, as cars lose value over time

What is an Acceptable Debt to Income (DTI) Ratio?

The lower your debt-to-income ratio is, the better, however, when lenders are considering lending you money, they’re generally looking to see if your debt-to-income ratio is less than 36%. That means your total monthly debt payments are less than 36% of your total gross monthly income. Additionally, your mortgage should be less than 28% of your total gross monthly income.

Can I Consolidate Debt Into My Mortgage?

Yes, you can consolidate debt into what’s called a debt consolidation mortgage. There are benefits and drawbacks to doing this, however, one key benefit is that you’ll likely pay a much lower interest rate on your debt by doing this. 

Can You Go To Jail For Not Paying Your Debts?

You cannot go to jail for not paying your debts. If you cannot pay your debts and a creditor sues you, you will end up in civil court. You will not be arrested, placed in jail, or forced to do any kind of court-ordered community service.

What Happens If You Ignore a Debt Collector?

You may get sued if you continually ignore a debt collector’s phone calls and letters. This is made worse if you ignore the lawsuit as well, as if the courts award a judgment against you in favor of the collection agency, the collection agency may have the ability to garnish your wages or even go after the money in your bank account.

Can Debt Collectors Show Up At Your House?

There is nothing that actually stops a debt collector from showing up at your house, however, there’s not much they can do except ask you for the money you owe them. If a debt collector does show up at your door, you do not need to open the door. Instead, you can ask them to leave and tell them you will discuss your debt over the phone or in writing. If you do pay your debt in person, make sure to get a receipt as proof that your debt is paid.

Can Settling a Debt Hurt My Credit?

Settling a debt will hurt your credit, however, it won’t hurt your credit as nearly as much as not paying your debt at all. Settled credit accounts will remain on your credit report for seven years, according to Experian.

What Happens If You’re In Debt and You Die?

If you die, creditors have a window of time to collect on your debts from your estate. There are some situations where others may be responsible for paying your debts after you pass away, including if someone has co-signed on a loan of yours or if your state’s laws require your spouse to pay your debts.

Wrapping It Up

The debt snowball and the debt avalanche methods are great ways to pay off debt, and paying off debt sooner than later will bring you one step closer to financial independence. 

What are you doing to pay off your debts faster? Are you excited to be debt-free one day?

You can get out of debt fast with an extra $20 per month applied to your credit card's minimum monthly payment. In this post, I detail how, as well as outline the debt snowball method and debt avalanche method.

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Ben
Ben
5 months ago

It is so easy to get into debt thesedays. I agree that you should lower your expenses by paying off a bit extra on the balance each month for credit cards.

I had never heard about the debt avalanche or debt snowball methods to pay down your highest interest rate debt first, but it both seem to make sense.

Meera
5 months ago

Informative post. Hope this article guides those who are trying to come out of their debts.

Sandy N Vyjay
5 months ago

These methods for crushing debt are really very informative and useful to help tackle the demon of debt.

Kenneth
Kenneth
5 months ago

this credit cards are like a trap,,,its how the bank earn their profit,,,so if you feel like you cannot be able to pay for it dont buy it

Michele
5 months ago

I always try to pay extra on debts. 20 bucks is very doable.

Rochelle
5 months ago

So informative! I know so many people with credit card and student loan debt

Nkem
5 months ago

This was quite informative and I’m sure helpful to many. I am soooo debt averse. I’ll do anything to stay away.

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