What you'll learn
- Compare avalanche and snowball approaches
- Prioritize manageable repayment plans
Debt repayment plans help organize what to pay first while keeping required payments current. The right approach depends on interest rates, cash flow, motivation, and risk.
Two common approaches
- The avalanche approach focuses extra payments on the highest interest-rate debt first.
- The snowball approach focuses extra payments on the smallest balance first.
- Both approaches still require making minimum required payments on all debts.
Manageability matters
A mathematically efficient plan is not useful if it cannot be followed. A sustainable payment amount and emergency cushion can reduce the chance of relying on new debt.
Example
If one card has a 22% APR and another loan has an 8% APR, the avalanche method would usually send extra money to the 22% card first.