If you owe money on a few things at once, a credit card, a store card, an overdraft and a car loan, say, the order you pay them off makes a real difference. Here are the two most popular ways to do it.
First, the rule for both
Always pay at least the minimum on every debt. Missing a payment usually means fees and a mark on your credit file. Then put every spare pound towards one debt at a time. When that one's cleared, its payment rolls on to the next.
The avalanche: highest interest first
Put your spare money on the debt with the highest interest rate, usually a store card or overdraft.
- Good: it costs the least in interest, every time.
- Not so good: if your most expensive debt is also your biggest, it can be months before you clear anything.
The snowball: smallest balance first
Put your spare money on the debt with the smallest balance, whatever its rate.
- Good: you clear your first debt quickly, which can keep you going.
- Not so good: it usually costs a bit more in interest.
A worked example
Take four debts worth £9,300 in total:
| Debt | Balance | Interest (APR) | Minimum |
|---|---|---|---|
| Credit card | £2,400 | 22.9% | £60 |
| Store card | £600 | 29.9% | £25 |
| Car loan | £5,500 | 7.9% | £180 |
| Overdraft | £800 | 39.9% | £30 |
The minimums add up to £295 a month. Paying £395 a month in total:
- Avalanche: debt-free in 28 months, about £1,605 in interest.
- Snowball: also 28 months, about £1,646 in interest.
- Minimums only: over six years and about £4,358 in interest.
The gap between the two methods is small here. The big saving is paying anything more than the minimums: an extra £100 a month saves over £2,700.
Which should you choose?
Pick the one you'll stick to. If you like seeing progress fast, the snowball is fine. If you want the lowest cost, use the avalanche. Either beats paying minimums.
If it feels unmanageable
If you can't cover your minimums, talk to a free debt charity such as StepChange, National Debtline or Citizens Advice before you miss payments. They can help set up a plan and speak to lenders for you.
This article is general information, not financial advice.