If you have multiple debts — credit cards, personal loans, a car payment, student loans — deciding which to pay off first matters more than most people realise. Two systematic strategies dominate the personal finance world: the debt snowball and the debt avalanche. Understanding both could save you thousands.

The debt snowball method

The snowball method, popularised by Dave Ramsey, works like this:

  1. List all your debts from smallest balance to largest.
  2. Make minimum payments on everything.
  3. Put every extra dollar toward the smallest balance first.
  4. When that debt is paid off, roll its payment to the next smallest.

The “snowball” refers to the momentum you build — as each small debt disappears, the payment rolls forward and grows larger.

Why it works psychologically

The snowball is a behavioural finance strategy, not a mathematical one. Paying off a small debt quickly delivers a genuine dopamine hit — a feeling of progress and momentum. Research shows this can keep people on track when a purely mathematical approach would lead to giving up.

The cost of the snowball

The downside is that you’ll often end up paying more interest overall, because small balances don’t necessarily carry the highest interest rates.

Example: you have two debts:

  • Credit card: $3,000 balance at 22% APR
  • Car loan: $8,000 balance at 6% APR

Snowball order: pay off the car loan first ($8,000 at 6%), even though the credit card ($3,000 at 22%) is costing you far more in interest every month.

The debt avalanche method

The avalanche method is mathematically optimal:

  1. List all your debts from highest interest rate to lowest.
  2. Make minimum payments on everything.
  3. Put every extra dollar toward the highest-rate debt first.
  4. When paid off, roll that payment to the next highest rate.

Using the same example:

  • Avalanche order: credit card first ($3,000 at 22%), then car loan ($8,000 at 6%).

This minimises total interest paid and, in most cases, gets you debt-free faster in calendar terms.

Which saves more money?

The avalanche almost always wins on pure numbers. How much depends on the interest rate spread between your debts.

Let’s model a real example with three debts and $500/month extra to apply:

DebtBalanceRateMinimum
Credit card A$5,00024%$100
Personal loan$8,00012%$150
Car loan$12,0005%$220

Available extra: $500/month

Avalanche result: debt-free in ~26 months, total interest ≈ $4,100
Snowball result: debt-free in ~28 months, total interest ≈ $4,900

The avalanche saves approximately $800 and 2 months in this scenario. For larger debts and higher rate spreads, the difference can be much larger.

Which should you choose?

Neither is universally “right” — the best method is the one you’ll actually stick to.

Choose the snowball if:

  • You’ve struggled to stick to debt payoff plans before
  • You need quick wins to stay motivated
  • Your debts are relatively similar in interest rate (so the mathematical difference is small)

Choose the avalanche if:

  • You’re disciplined and can stay motivated even without early wins
  • Your debts have very different interest rates (e.g., a 25% credit card and a 5% auto loan)
  • You want to minimise total cost

The hybrid approach

Some people split the difference: start with the snowball to knock out one or two small quick wins, then switch to the avalanche for the remaining debts. This captures the psychological benefit of early wins while minimising total interest on the larger balances.

What to do with freed-up payments

Once a debt is paid off, don’t let that money disappear into lifestyle inflation. Immediately redirect the freed-up minimum payment to the next debt (snowball or avalanche order). This is the key mechanism that makes both strategies work — keeping the same total payment while concentrating it on fewer debts.

After all debts are paid, redirect all those payments to savings and investments. The habit of “paying yourself first” is already built in.

Maximise savings with the right tools