Most people can feel weighed down by debt at some point in their lives, and it can be overwhelming trying to figure out a clear path to becoming debt free. Similar to the debt snowball method, another common debt repayment method is debt avalanche, which is also recommended by financial adviser Dave Ramsey.
WHAT IS THE DEBT SNOWBALL METHOD?
The debt avalanche, also known as debt stacking, is where you pay off your debts in order from the highest interest rate to the lowest interest rate, regardless of the debt amount.
For example, you might owe:
- Credit Card 1: £2,000 19%, highest interest rate
- Credit Card 2: £4,500 13%, second-highest interest rate
- Car Loan: £6,000 8%, third-highest interest rate
- Student Loan: £1,500 5%, lowest interest rate
The idea is that you make minimum payments towards each debt, but if you have any extra money in your budget, you pay it towards the debt at the top of the list with the highest interest rate. This way, you eliminate the debts with the most interest first, so you can reduce the amount of interest you are paying to put it towards the other debts.
WHAT IS THE DIFFERENCE BETWEEN DEBT STACKING AND DEBT SNOWBALL?
The biggest difference between the two repayment methods is how you list the debts. Using the debt snowball plan, you list your debts from smallest to largest, regardless of interest rates. As you pay off the balance of smaller debts, you gain the motivation to help you tackle your larger debts.
With the debt stacking plan, you list your debts by interest rate, going from highest to lowest debt. By paying off the debts with the highest interest rates first, you pay less interest over the long term. Considering that we pay 34% of the money we make over our lifetime to interest, this is a huge saving that you would be making, although it may take you longer using the debt stacking method.
IF YOU ARE STRUGGLING WITH DEBT…
Whichever method you decide to go with to pay off your debt, make sure that you are not creating new debt. It will make it impossible to get out of debt unless you change your financial habits right now.
Stepchange offers expert advice to help you handle your debts and get the support you need. You can get advice online or over the phone, and they can recommend a range of debt solutions based on your personal situation.