On this page
A debt avalanche directs extra repayments to the highest-rate debt, while a debt snowball directs them to the smallest balance. Keep required payments current on every debt in either method. The avalanche gives the larger immediate interest reduction per extra pound when rates differ; a snowball can be a deliberate choice if clearing an account sooner helps a client keep to the plan.
Start with the client’s cash flow
List each balance, interest rate, required payment and available extra cash. Then identify whether the client prioritises interest cost or a quick account closure, while allowing for liquidity and other commitments. CFP Board includes financing strategies and debt management in its exam content outline. Its debt management guidance also places borrowing decisions within the wider household plan.
One illustrative ledger
Assume two invented balances: Card A is £5,000 at a fixed 24% annual rate with a £100 monthly minimum; Card B is £2,000 at a fixed 12% annual rate with a £50 monthly minimum. The client can pay an extra £200 this month after both minimums. For this simplified illustration, interest accrues monthly at the annual rate divided by twelve, and both extra-payment choices occur at the same time.
| Card A | Highest rate first | £4 |
| Card B | Smallest balance first | £2 |
The illustrative calculation multiplies the extra £200 by 24% divided by twelve for Card A, or by 12% divided by twelve for Card B. That gives £4 or £2 less interest in the next month, respectively, before any later balance changes. The £2 difference is a one-month comparison, not a forecast of total repayment cost or payoff date. Real revolving accounts may calculate interest daily and apply payments under different terms.
What candidates should test
- Do not skip the minimums. Targeting one balance does not remove contractual payments on the others.
- Do not confuse balance with rate. The smallest debt is not automatically the costliest debt.
- Do not infer savings from a lower payment alone. For consolidation, compare the new rate, fees, repayment term, total interest and any change in collateral. A longer term can reduce the monthly bill while increasing total interest.
The sound explanation separates the arithmetic from the client’s ability to follow it. For related planning context, see CFP emergency funds and the CFP programme page.
Sources
- CFP® Exam: What You’ll Be Tested On | CFP Board · cfp.net · Retrieved
- Getting Smart About Your Debt | CFP Board · cfp.net · Retrieved
