• Debt Payoff Methods Explained

    Paying off debt is (obviously) one of the biggest steps in one's journey to become, and ultimately stay, debt free. Getting rid of all of your consumer debt is great for your long term financial success because it frees up room in your budget from minimum payments to your creditors, and reduces the wasted interest that just goes to banks and credit card companies for stuff you already bought.

    The key to paying off debt quickly is focusing on a single debt, and pay more than the minimum payment until it is gone. When you make your first budget and list all the regular bills you pay (rent, utilities, food) and minimum payments on all your consumer debts (auto loans, credit cards, student loans), you should hopefully have some money left unaccounted for. This "extra" money is what you will use to attack your first debt. Using this money, you pay more than the minimum payments on one of your debts until it is completely paid off, then add what you were paying on that debt into the payment you send to the next debt on your list.

    How you choose to order your debt payoff snowball will determine how long it will take to become debt free, and how much interest you will pay over that time. In this article, we will go over 2 of the most popular methods of paying down debt quickly then compare those with just paying minimums. These two methods describe what order to pay off each debt; smallest balance first (Dave Ramsey Snowball) or highest interest rate first (Avalanche).


    To keep things simple, we'll invent a hypothetical family we'll call the Smiths. The Smiths are more than $80,000 in debt with 3 credit cards, a medical bill, 2 cars, and a student loan.

    Using a debt payoff calculator we can see that paying only the minimums on each debt it will take them 81 months (almost 7 years!) to pay off all that debt, and pay more than $16,000 in interest alone for the privilege of borrowing that money!

    Luckily, the Smiths have $325 per month left over in their budget (snowball) that they can use to pay more than the minimum payments, and get out of debt faster and reduce the amount of interest paid on those debts.

    The Dave Ramsey Debt Snowball

    The Dave Ramsey snowball method is one a popular and successful method of paying off debt because you choose to pay off your debts in order from lowest starting balance, ending with the highest. By using your snowball to pay above minimums on just the lowest debt, it will be paid off faster than you could snowball a larger balance, giving a few quick wins for the psychological boost to keep going.


    In this instance, the debts have been reordered by balance. By paying the minimum payment ($49.56) and the snowball ($325), the Smiths pay $374.56 to their lowest credit card, and end up paying it off in 8 months. If two debts have the same balance, paying the higher interest rate debt first will lessen the total amount of interest paid, but would not change the total time to debt payoff.

    On the 9th month, they would add the $49.56 to the new snowball, paying $374.56 plus the $74 minimum payment on the medical debt. That $448.56/mo pays off the medical bill in a few more months, and the snowball gets bigger and bigger as minimum payments are added each time a debt is paid, until the final debt when they are paying $1,808.18 every month to pay off the second car.

    Using this snowball method, they are completely debt free in a little over 4 years, and pay just $11,000 in interest.

    Avalanche Method


    The avalanche method orders your debt payoff list by interest rate, highest to lowest. By focusing on your highest interest debt, you pay less overall interest to the bank and the total length of time in debt is the lowest. The downfall to this method is often the highest rate debts usually carry the larger balances, and aren't paid off quite as quickly as the DR Snowball. If two items share the same interest rate, paying the larger balance of the two first eliminates the most interest.

    In our hypothetical family - the Smiths have 3 credit cards over 9% interest, and pay those off before moving on to the lower interest rate debts. It takes almost 18 months to see the satisfaction of paying off that first credit card; however, they are completely debt free 2 months quicker than the DR Snowball, and pay a total of ~$9,500 in interest, saving $1,500 more than the snowball method.


    Paying more than the minimum payments on your debt gets you out of debt faster, and saves you money. So using either payoff method is an overall win. What matters most is that you're paying off debts so that you can use that money to grow your overall wealth, preparing for retirement, or maybe an education for your children.

    If you're a math nerd, and can hold out on seeing that first debt being completely paid off - the Avalanche method can work for you. From a pure math standpoint, it is the fastest and cheapest way to be completely rid of debt.

    However, math isn't always the great motivator. Using the Dave Ramsey Snowball, saying "Goodbye!" to a few small debts in your first months gives a sense of accomplishment and quick positive feedback that you're on the right track to success. Those first few wins may be the only thing that keeps you on track all the way to debt freedom.

    If you are new to Debt Free Fanatics, and want to learn more about techniques for getting out of debt, we encourage you to register and participate in our forums. Our members have been managing their money for years and are happy to offer advice and instruction on how you can manage your money better and get out of debt.