Making one big decision can help you dig out of debt faster


Welcome to Day 28 of our 30-Day Easy Money Makeover! Every day in April, we’re bringing you strategies to help you improve, and feel more confident about, your money situation. Follow along and see the rest of the calendar here .

When it comes to debt, you can climb out or remain stuck. There’s one big decision to make that can help you: Which repayment strategy to use.

The average American has around $38,000 in personal debt, not including mortgages, according to industry data . That includes debts such as outstanding credit card balances, auto loans, and student loans. Spending all of that money is easy, of course. But paying it off, particularly when you’ve racked up thousands of dollars in balances, can be difficult.

Credit card expert Beverly Harzog, author of “The Debt Escape Plan,” says many people get into debt because they don’t understand how fast balances can grow.

“Personal finance is just not intuitive. And credit, in particular, is a mystery to most people,” she tells Grow. Harzog herself racked up more than $20,000 in credit card debt before she managed to get her spending under control. “I understand it. I empathize with people who are in debt,” she says.

How did she do it? A combination of two popular debt repayment strategies: the “avalanche” and the “snowball.” Here’s how to figure out the best method for you:

What's the difference between a debt avalanche and a debt snowball

1. Assess the situation

Before you take action, get a handle on your finances. That should include a few key steps.

First, make a list of all your debts, including balances and rates. Note any other key details, like if there’s a promotional rate that ends on a set date.

Next, set up a budget . A budget is your financial blueprint, and will give you an idea of where your money is going on a monthly, weekly, or daily basis. It will also give you some insight into how much cash you have after covering expenses, to put toward your debt every month.

Then see what you can do to free up more money by downsizing your expenses and cutting out your credit card usage. (You’ll find plenty of savings ideas in the other days of the money makeover.) You might also consider consulting a credit counselor.

This analysis will help you weigh which payoff strategy is a good fit. You should also away come with an idea of how you got into debt in the first place so that you can get ahead of any destructive patterns.

“Understand how it happened,” Harzog says. “Otherwise you might end up in debt again.”

2. Pick a method

This part is all about focusing. Whichever strategy you go with, you're focusing your extra efforts (and cash) toward one debt at a time, and making the minimum payments on all of the rest.

One popular strategy is known as the "snowball" method. The gist of this strategy is to target whatever debt has the smallest balance. For example, if you have a credit card with a balance of $50, another with a balance of $200, and a car loan with a balance of $1,500, you would pay the $50 balance off first. This allows you to kick the "snowball" down the hill, in a sense.

As the snowball rolls downhill, it gains mass and momentum, giving you a mental reward. "Psychologically, [the snowball method] works well for some people," Harzog says. In fact, several studies have found it to be more motivating , making users more likely to stick with debt repayment. But there's a catch: "You end up paying more money," she warns, because your debt with the smallest balance may not charge the highest interest rate.

That's where the "avalanche" method comes in. The avalanche strategy has you pay off the debt with the highest interest rate, or APR, first. By eliminating your high-interest debts first, you'll end up saving more in interest payments over time, meaning that you end up keeping more of your money.

The avalanche method may not give you the immediate gratification that the snowball method offers, but it will provide bigger rewards in the long run.

Harzog used a combination of approaches to pay off her debt, a move she calls "the blizzard." The blizzard is an alternating attack between the snowball and avalanche, meaning that you first pay off your debt with the smallest balance, and then set your sights on the balance with the highest interest rate. Rinse, repeat, and walk away debt free.

And while you can use any icy attack you'd like, Harzog says that the most important factor in choosing your strategy is to stick to the one that keeps you on track. "Whichever one works for you is the right choice," she says.

More from Grow: