Holiday debt stress? Try paying it off in an avalanche — not a snowball

Canadians who are staggering under a hefty debt load may find that burden even heavier when their post-holiday credit card statements arrive.

"A lot of people find themselves in financial trouble after the holidays because they really don't make a plan beforehand," says Laurie Campbell, chief executive of Credit Canada Debt Solutions.

"They get carried away with the emotions. They feel like they have to keep buying ... so, come the new year, they get their credit card statement in mid-January and they realize they've really blown it."

There are a number of strategies for debt repayment, among them the snowball and avalanche methods. Experts recommend taking stock of your personality to determine which strategy is best for you.

"Which approach is better depends on who you are," says Blake Elyea, a senior vice-president with Grant Thornton's consumer insolvency team in Vancouver.

'Snowball' method tackles small debt first

The snowball approach, popularized by U.S. radio and TV personality Dave Ramsey, involves tackling your debts from smallest to largest.

Knocking off the smallest balances first — while maintaining the minimum payments on all the other debts — gives the debtor some "quick wins," making it a good approach for those who need to see some instant results in order to stay motivated, says Elyea.

"We all like instant gratification," says Elyea. "We want to see that we're making progress."

'Avalanche' involves paying highest interest first

In contrast, the avalanche method involves tackling the highest interest rate debts first — an approach that can save you money on interest payments, but may require more willpower if your highest-interest debts are also the largest ones.

"Mathematically that's the best approach," Elyea says. "However, you're not going to see the instant results necessarily as quickly with that approach. It's going to take more discipline."

If you're going to adopt the avalanche approach, Campbell recommends checking your balance regularly so you can see the progress you are making. She also suggests enlisting the help of a mentor or a friend to help you stay on track and giving yourself little rewards along the way, such as a night out or dinner at a nice restaurant.

"It's kind of like a diet," says Campbell. "If you don't give yourself a little bit of a reward every now and again it's very easy to get discouraged, feel like it's not working, trash it completely and go back to your bad spending habits."

Reminding yourself of your long-term goals — things you want to do after you pay off debt such as go on vacation or purchase a house or a car — can also keep you motivated, says Campbell.

Different options

Although the avalanche method will save money on interest payments compared with the snowball technique, Elyea says any strategy that involves taking stock of your financial situation and actively tackling your debt load is a good one.

"If you have a structured way you're going to approach your debt, either method is going to get you there," says Elyea. "One might take you a bit longer than the other."

Joshua Moore, a 27-year-old Toronto resident and recent graduate, says he plans to use the snowball method to whittle away at his debts, which include student loans, one credit card, a student line of credit and a number of personal debts owed to family and friends.

In total, Moore, who recently completed a post-graduate degree, has accrued over $50,000 in student-related debts. His plan is to get rid of the "pesky stuff" first, such as the credit card and the personal loans, so that he can build momentum and consolidate all of his loans into one or two sources.

"I just want to get the source of debt focused in one place, instead of getting different bills from all sorts of different places and having to worry about keeping track of a whole bunch of different debts," says Moore.

Even if he were aggressively attacking his government student loan, which is nearly $42,000, it would take him about nine years to pay back — a disheartening fact, says Moore.

"I know the student loans aren't going to go away," he says. "My goal is to get rid of those other sources first before I take on the big, bad guy."

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