Unit 3 · Level 1 · Debt, honestly
Avalanche versus snowball
Say you owe €4,000 on a card at 24%, €600 on a store card at 19%, and €2,500 on a car loan at 11%. You pay every minimum, then put whatever is spare on one debt. The avalanche sends it to the 24% card. The snowball sends it to the €600 store card, because clearing something feels like winning. Same budget, different order.
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What you get asked
Order these debts the way the avalanche method attacks them, once every minimum is covered
The avalanche ignores the size of each balance completely and sorts on rate alone, highest first. It is the order that costs the least money in total, every time.
That €4,000 card at 24% adds about 2% to the balance each month. How many euros of interest does it add in one month while you are busy clearing the €600 store card?
About €80 a month, and that is the price of the detour. The €600 store card adds under €10 over the same month, so the big card is where the damage is happening.
What is the honest trade-off between the two methods?
Avalanche wins on arithmetic and always will. Snowball wins on the part the arithmetic cannot see, which is whether you are still doing this in month nine.
Match each label to what it actually describes
Both plans pay every minimum first. The only decision is where the spare euro goes, and that choice is the entire difference between them.
Studies of people actually repaying debt keep finding one thing about the snowball. What?
Early wins keep people going, and a plan you abandon saves nothing at all. If the rate gap is small, take the momentum. If one debt is at 24% and the rest are at 5%, take the maths. 🐜
The rest of this unit
Compounding runs in both directions, and on a credit card it runs at you.