There are many theories as to how best to pay off your credit card debt. One, the Debt Snowball, was popularized by Dave Ramsey and has many followers. In it, a borrower pays off the lowest balance rate card first and then “snowballs” the payment from that card onto the next lowest balance until they are all paid off. One of the benefits of doing it this way is that you get a “quick win” when you pay off the first card. And because you are “snowballing” the payments onto the next card, as the balances go up, so does the payment and your first “quick win” turns into another. Then another.

Flexo at Consumerism Commentary seems to think that that isn’t the best way to do it. According to him, the method that he calls the “debt avalanche” is the “correct” way to pay off debt. In this method, you arrange your debts in order of highest interest rate first to lowest interest rate last. As you pay off your debts, you are saving more money on interest and paying the grand total off in a faster length of time because of it. In his words:

By choosing the

Debt Avalanchemethod, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

And he’s right. Mathematically. And if we are all robots, it will work for each and every one of us. What he fails to do is take into account the human factor. Let me make an example for us.

Meet John Consumer. He’s your typical American. He likes his goods now and he’d rather not wait. He’s seen the error of that thinking and wants to pay off his debt and start fresh by saving for his purchases. Smart, no? He has four credit cards. They have balances (in order of highest to lowest) of $5000, $3500, $2000, and $850. They have respective interest rates of 10%, 27.99%, 11%, and 8.99%.

If we take his cards and line them up by what Flexo calls the debt snowball method (via Dave Ramsey), we get a list of cards that looks like this: $850 (8.99%), $2000 (11%), $3500 (27.99%), and $5000 (10%). Let’s assume that the minimum payments on these are $29, $45, $65, and $100. John has an excess amount for debt repayment of $300 a month. So, if we use the debt snowball method, the first card gets paid off in about 3 months. One card down, three to go. The next card gets paid off with payments of $374 in about 5 months. Two down, two to go. The $3500 card gets paid off with payments of $374 + $65 = $439. It takes about 8 months. The final card gets payments of $439 + $100 = $539. It’s paid off in a mere 7 months. For those that are counting, it takes 7+8+5+3=23 months to pay them all off. (note: I didn’t get all fancy and amortize these out. I did, however round up to the nearest month, so when it said that it would only take 2.58 months to pay off the $850 card, I rounded to three. That should account for the interest and then some on each card.) In less than two years, the total ($11350) is paid off.

Now let’s look at the same situation, but let’s use the Debt Avalanche method of Flexo. In this method, the cards would be lined up thusly: $3500 (27.99%), $2000 (11%), $5000 (10%), and $850 (8.99%). Minimum payments remain the same and the excess debt payment of $300 still remains. So, lets start with the $3500 card. We use a payment of $365. It takes 10 months to pay off. We then use a payment of $365 + $45= $410 to pay off the $200 card. It takes 4 months. Next. $410 + $100 = $510. 8 months later, the $5000 card is paid off. Finally, we’re left with the $850 card. Our minimum payments of $29 over the 22 months so far have taken up $638 of principle and interest. So it takes a mere 1 month to pay off that card. Total time to pay off? 23 months.

I took some liberties with interest, but the time to pay off is still amazingly similar. It may widen a bit if it were to be amortized out, but not enough to make it worth doing. Also, if the balances were significantly higher (2x?) it would make the gap significantly larger as well. But, I create that example to give two points.

- There really isn’t any truly “Correct” method. Each situation will be different and will need an individualized method. In our case, we recently paid off a car loan that was at a measly 5% interest. Why? Because it freed up nearly $200 a month that could be used on a credit card. How hard would most people work to bring in an extra $200 a month in income?
- In the Debt Snowball example, the first card is paid off in 3 months. That’s what Dave Ramsey refers to when he says “quick win”. It’s exactly that. A quick win. A major boost to your moral. You just paid off a credit card! Doesn’t it feel great! In the Debt Avalanche method, it takes 10 months to pay off the first card. That’s nearly a year! How many people will have given up by then that wouldn’t have if they had gotten that “quick win” at the beginning?

Mathematically, the Debt Avalanche is the “correct” method. It makes sense, and it will save you interest and it may save you some time too. But it isn’t as cut and dry as all that. Mathematics depend on absolutes.

regardless of your culture or educational system, you must agree that one plus one equals two

1+1=2. An absolute. But what happens when you throw in a little human chaos? Absolutes aren’t absolute anymore. Another fallacy here is that the debt snowball is strictly a lowest balance to highest balance method. It isn’t. Dave suggests that as a good starting point. But he also suggests that you weigh the interest rates as well.

You’ve got to individualize your plan. Each of these methods is a sound one. They each have their merits. But each is an absolute in an non-absolute world. If you are a person that is willing to stick to your guns for that 10 months to pay off the largest balance card, then by all means, do it. When you make it to the bottom of that balance, you’ll be rewarded. But the same goes for those that start with the smallest balance first. The reward is just as great. And the goal is the same. Debt Free Financial Freedom. Do what is right for you, and that will get you to your goals.

P.S. While we’re on the subject of mathmatics, I know the proof that proves that .999… is equal to 1. It isn’t a false proof. It’s widely accepted. So, 1+1 could equal 1.8999… , or 1+1 could equal 1.999…, or it could actually equal 2. Not so absolute anymore is it?

The Happy Rock says

I am with you on this one. Ramsey’s advice is simple and for the general population. Sure there are other plans that are theoretically better, or ones that may work better for your skills and personality, but finished is what counts.

If you get stuck a year in, the plan wasn’t good. The debt snowball helps breed confidence and change behavior. The system helps you win psychologically, and I want the system to encourage people onto bigger things!

Tristan says

I think if you actually did the figures extracting the interest from each monthly repayment the result you would get would be completely different.

Why? Because at the starting balances, the cards had the following amounts payable for interest:

$850 card = $6.37 pcm

$2,000 card = $18.34 pcm

£3,500 card = $81.64 pcm (which is more than the minimum payment BTW)

$5,000 card = $41.67 pcm

So the actual balance on the £3,500 card is increasing as the interest is capitalised, or more likely, the minimum payment would be greater.

JoeTaxpayer says

The snowball method pays off in month 25 with final payment of $401, the avalanche method in month 24 with final payment of $504. In this short example, avalanche wins by $436.

The difference is more dramatic as one takes longer to pay off their cards. So your point is well taken, but here’s the rub. If one has the funds and the motivation to wipe out their debt in less than two years, I’d say they are in good shape to begin with. When one has such debt that it will take 4+ years to pay it off, that’s where the $1000 toward your 28% rate compared to the 9% rate has the most impact. That’s $190 difference on just that $1000, by choosing to pay the higher rate.

When I was young and stupid, I found that the high interest cards were happy to give me huge credit lines. It was the 8% cards that gave 1-2K. So my stack of $1K cards had half my balances, but less than 1/4 of the interest cost.

Joe

mike craig says

I think that Dave’s method is much more behavioral. It’s based on how people actually respond. For that I reason I favor his approach. Of course, a highly disciplined person or couple can make either plan work; but the reality is that people,all people, just aren’t that highly disciplined.

Michelle says

I think as long as you are aware of your debt and you are making an effort to pay down that debt, it should be applauded. I personally do the snowball method, but I understand the point of paying the highest interest rate off first.