How the payoff plan works
Every month each debt gets its minimum payment. Whatever is left of your monthly amount goes to one target debt. When that debt is paid off, its minimum and the extra roll to the next target, so the payment aimed at debt never shrinks; it just moves. The calculator runs that month by month, adding each debt's interest first, until every balance is zero.
The example has three debts, $22,500 in all: a credit card of $6,000 at 27.99%, a store card of $2,500 at 19.99% and a car loan of $14,000 at 6.9%. Paying $900.00 a month by the avalanche order clears everything in 2 years 5 months with $3,353 of interest. Paying only the minimums of $605.00 takes 4 years 4 months and costs $8,363.
Avalanche and snowball
The avalanche targets the highest interest rate first. It always costs the least interest, because the most expensive balance shrinks first. Here the order is Credit card, Store card and Car loan. The snowball targets the smallest balance first, so the first debt disappears sooner and you have one fewer bill to track. Here the order is Store card, Credit card and Car loan, taking 2 years 5 months and $3,595 of interest. The gap between the two methods is $241 on these debts; on debts with similar rates it can be close to nothing.
What a little more each month does
Extra money goes entirely to the target debt, so even small amounts cut the time a lot. Adding $200.00 a month to the $900.00 plan finishes in 1 year 11 months instead of 2 years 5 months and saves $840 of interest. The savings bucket in the budget calculator is a good place to find it.
Why minimum payments take so long
A credit card minimum is set low, often interest plus a sliver of the balance, so most of each payment goes to interest while the balance barely moves. On the credit card in the example, at 27.99%, a month's interest on $6,000 is about $139.95. Anything you pay above the minimum goes straight to principal and stops that interest from building on itself.
Fixed-term loans such as car and student loans already have a payment that clears them on schedule. They usually carry lower rates, so they come last in the avalanche order, and paying them early saves less than clearing a card.
What the inputs mean
- Monthly amount for all debts: everything you can put toward debt each month, minimums included.
- Balance, rate and minimum for each debt: from your latest statements. Use the APR, not a promotional rate that is about to end.
- Method: avalanche or snowball.
Common mistakes
- Paying extra on a low-rate loan while a card at 27.99% grows. Rate order matters more than balance size for cost.
- Closing paid-off cards straight away, which can lower your credit score by shrinking available credit.
- Adding new charges while paying down old ones. The plan assumes the balances only fall.
Debt payoff questions
Snowball or avalanche: which is better?
The avalanche costs less: on these debts it pays $3,353 of interest against $3,595 for the snowball. The snowball clears the smallest balance first, which some people find easier to stick with. The best method is the one you will keep paying.
How long will it take to pay off my debt?
With $900.00 a month on $22,500 of debt, 2 years 5 months. Paying only the minimums, $605.00 a month, it takes 4 years 4 months and $8,363 of interest.
Should I save or pay off debt first?
Both, in order. Keep a small emergency fund so a surprise bill does not go back on a card, take any employer 401(k) match, then put spare money on high-rate debt. Once cards are cleared, the freed-up payments can go to savings.
What if my monthly amount is less than the minimums?
Then the balances will grow, and the calculator says so. Call the lenders before you miss a payment: many offer hardship plans with lower rates or payments, and a nonprofit credit counselor can arrange a debt management plan.
Should I consolidate my debts?
A consolidation loan or balance transfer helps only if its rate, after fees, is lower than the rates you pay now and you stop adding to the old balances. Enter the new loan as a single debt here and compare the total interest with your current plan.