Paying off debt: start small or big?
Is the snowball or avalanche approach right for you?
The average amount American households owed on credit cards in 2014, according to Federal Reserve statistics.Footnote1
Start with the smallest balance first, pay it off and work your way up to the largest balance.
Extinguishing one small debt can help you build momentum toward larger debts and give you a psychological lift.
Focusing on the size of the balance, rather than the interest rate, could mean paying more in interest than the avalanche approach.
Start with the highest-interest debt, then work your way down to lower-interest debt.
Prioritizing high-interest debt minimizes the overall amount of money you pay in interest.
The highest-interest debt may not be the smallest debt, so you may not get the psychological boost of retiring your smallest debt right away.
Paying down high-interest-rate debt first will minimize the overall amount of money you pay in interest.
Don’t fall behind on your other card payments and go into default.
Typically lenders prefer you to use less than 30 percent of your available credit.
Snowball or avalanche?
It’s up to you to decide what the best approach is for you, but either way, paying down debt is a major step to improving your financial health and improving your credit.