JagInsights › Glossary › Debt payoff
What is a debt payoff plan?
A debt payoff plan is the order you pay balances above the minimums. Avalanche and snowball, and what each one optimizes.
A debt payoff plan is a decision about extra money: which balance gets it, after every minimum is paid. Avalanche sends the extra to the highest APR. Snowball sends it to the smallest balance.
Worked example
Card A is $800 at 24 percent. Card B is $4,000 at 16 percent. You have $100 extra after minimums. Avalanche puts the $100 on card B only if B's rate is higher. Here A is higher, so avalanche puts the $100 on A. Snowball puts the $100 on A as well, because $800 is the smaller balance. The methods disagree when the small balance is also the cheap one.
Why it matters
Minimums keep the account current. They are not a payoff plan. The extra dollar is the plan.
Questions people ask
Which method saves more interest?
Avalanche. The highest rate costs the most per dollar each month, so paying it first reduces the interest you will be charged.
Why do people use snowball?
A paid-off account is visible. If that is what keeps you paying, the method you will finish beats the method you quit.
Should I close the card when it is paid?
Not automatically. Closing it can raise your utilization. Leave it open if there is no annual fee and you will not run it back up.
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