When someone who has accumulated debt across a number of credit cards embarks on the journey to rid himself or herself of this debt, and when that person is generating enough monthly income to cover all expenses and the minimum payments due on all cards with additional funds left over, there are two main philosophies describing the best way to achieve this goal. Although all approaches are good, there is no question where I stand on this issue.

I suggest following the path that affords the opportunity to get rid of debt as quickly and as cheaply as possible. This method has many names, but I’ve called it the Debt Avalanche in the past. The opposing viewpoint is the Debt Snowball, popularized by author and guru Dave Ramsey. This method suggests paying off debt in such a way that it might take more time and be more expensive but offers “quick wins” which help some people gain encouragement and momentum at the earliest stages of the process. And there are, of course, many points of view that present a compromise between these two extremes.

The snowball approach to debt reduction

By ordering your credit card debts from lowest balance to highest balance and paying the minimums to all except the first on the list each month, you will pay off your first debt sooner than by following any other method. If you need encouragement to continue your journey as you pay off debt, you can celebrate after your first credit card has a zero balance.

Not everyone requires this type of extra motivation for paying off debt. Additionally, even those who need extra motivation may not suffer by choosing a cheaper and quicker method of paying off debt. The “quick win” of paying off the first debt could come just as quickly by using the Debt Avalanche. But even if the first payoff doesn’t come as quickly, you can redefine your first milestone to allow yourself helpful celebrations as explained in the next section.

J.D. Roth from Get Rich Slowly has seen success with the Debt Snowball approach, as have many others. It is the most widely marketed philosophy.

For an illustration of the monthly process of sending minimum payments to all credit cards except the one on top, regardless of how the debts are ordered, see this visualization from No Credit Needed.

One major problem I have with the above snowball approach is that your largest balance may be significantly more expensive than your smallest balance. Today it is not difficult to find a default interest rate on a credit card north of 30%. There is no way in good conscience I could recommend holding off on eliminating a debt this expensive in favor of paying off a small balance with a 7.9% interest rate. The same goes for payday loans, whose fees can border on usurious if interpreted as interest rates.

The avalanche approach to debt reduction

There is no question that anyone who follows this alternate approach to its conclusion will have emerged from debt sooner and by paying the least amount of interest possible. Some people argue that it is not as likely for someone to follow the Debt Avalanche through, but there are no data to support this. By ordering your credit card debts from the most expensive (highest interest rate) to the least expensive and paying the minimum each month to all cards except the first on the list, you reduce your interest payments quicker.

Since this is a mathematical approach, critics say it doesn’t take into account the emotions that come into play when dealing with money. It is true that emotions — your feelings about money — play an important role in financial decisions, and although this is a mathematical approach, how you feel about money still is represented in this method.

• If you follow the Debt Avalanche method, you can feel good knowing that you’ve made a sound decision and will spend less money than others who take a different approach.
• You can motivate yourself throughout by creating your own milestones for achievement, including paying off your first credit card, paying off $1,000 (or some other meaningful amount), or consistently reducing debt for six months (or some other meaningful time frame).
• Your emotions may be the cause of your debt in the first place. While they obviously cannot be eliminated, learning to focus on the best mathematical approach for certain financial decisions can improve your overall relationship with money.

Here I outlined the details of the Debt Avalanche. Trent from The Simple Dollar also likes the Debt Avalanche approach and Five Cent Nickel explains how Dave Ramsey is bad at math.

Other approaches to debt reduction

The hybrid approach. Somewhere between a snowball and an avalanche lives this hybrid. The concept here is simple. Order the credit cards from highest interest rate to lowest, like the Debt Avalanche, but move the card with the lowest balance to the top. This will provide a “quick win” if necessary but could still save significant money and time when compared to the Debt Snowball approach.

Pay the most annoying debts off first. This approach plays directly into the human psyche. The urge to eliminate a persistent itch is strong enough to motivate anyone to scratch, just ask any kid with chicken pox. Stephanie from Poorer Than You is a fan of this approach. This works well when you include debts other than credit cards. If you have a personal loan from a family member, I usually suggest paying that debt off the quickest while paying minimums to your credit card to help retain good will within close relationships.

Baker from Man vs. Debt says the same thing slightly differently: Pay off the debt with the highest emotional impact first. The argument here is simple. For some people the debts with the highest emotional impact are simply the debts with the highest interest rate, while others have a different psychological composition requiring alternate focus. You can’t go wrong by this approach which if continued will help you feel better quicker.

So what is the “right” answer?

It is easy to say, “Do what works for you,” and allow the debtor to come to his or her own conclusions. This can be a dangerous approach as it invites people to skip the consideration of all the options. Many people I’ve talked to who have successfully eliminated debt by using the Debt Snowball method not only found themselves back in debt after some time but did not realize that they could have saved hundreds of dollars and been out of debt sooner just by ranking their credit cards in a different order. They simply followed a guru’s advice without any critical thinking. Not only did they not learn to approach money from a more stable viewpoint but they paid extra money in the form of credit card interest for this “feature.”

Would they have succeeded if they were simply presented the idea that they could save money on their debt reduction journey by following a more mathematical approach? It’s certainly possible.

There is no approach that does not have some sort of merit. Getting out of debt in any way possible is better than not getting out of debt at all. All that I ask is that the details, including the total cost and time differences, are fully explained before a method is prescribed for someone else.

Here’s a calculator that will help inform anyone in debt about the timing and bottom-line differences between the various approaches to eliminating debt. In some cases, the cost of one method over the others will be striking.

An informed decision is the best type of decision. With a full understanding of the differences and is familiar with their own psychological tendencies, someone with debt can make an intelligent choice that is right for the individual or family.

Photos: House of Sims, Joe Shlabotnik

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