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The debt avalanche method involves paying off debts in order of highest to lowest interest rate: Pay the minimums on all debts, but add whatever extra you can to that with the highest interest rate.
It’s a good option for people whose eyelids twitch when they think about how much a high interest rate adds on top. But less so for people whose highest-interest balances will take a long time to pay off.
We’ll explore the ins and outs of the debt avalanche method, and compare it with another popular approach — debt snowball.
What is the debt avalanche method?
The debt avalanche method targets your debt with the highest interest rate first, then the debt with the next-highest interest rate, and so on. This route may help you save on interest over time. But it can take a while to knock out the first balance if it’s large.
If you tend to be analytical and patient, the debt avalanche method may appeal to you.
How does the debt avalanche method work?
To use the debt avalanche, follow these steps:
- List your debts (not including your mortgage), in order of highest interest rate to lowest.
- Calculate how much more than the minimum payments you can put toward debt each month.
- Pay the minimums each month on all debts except the one with the highest interest rate.
- Put the extra money you’ve determined you can afford toward the debt with the highest interest rate each month until you wipe it out.
- Next, put all your extra money toward the debt with the second-highest interest rate.
- Repeat until all debt is paid off.
Each time you pay off a balance, add whatever you were paying toward it to the amount you’re throwing at the next debt on your list. Start at the peak, then pick up mass and speed as you go.
» Learn about more ways to pay off debt
Debt avalanche example
Let’s say you have the following debts:
- A medical bill for $1,500 at no interest.
- A credit card balance of $2,500 at 22.9% interest.
- A credit card balance of $5,000 at 15.9%.
What you pay each month: The minimum on all balances.
Where you put any extra cash first: The $2,500 credit card at 22.9% interest.
What you’d pay off last: The $1,500 medical bill at 0% interest.
Debt avalanche vs. debt snowball
The debt snowball method is another way to manage multiple debts. By contrast, debt snowball has you target the debt with the smallest balance first, no matter the interest rate. Pay it off, then move to the next smallest loan, ideally in fairly quick fashion.
If you need short-term victories to keep you going, debt snowball may be more appealing.
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Benefits and drawbacks of each method, according to Reddit:
We used AI to sift through Reddit forums, analyze feedback and summarize how users feel about debt payoff strategies. People post anonymously, so we cannot confirm their individual experiences or circumstances.
Avalanche
- Benefit: Save more money on interest.
- Benefit: Can lead to faster debt pay off.
- Drawback: May be harder to stick with, psychologically.
- Drawback: May not be suited for people with less discipline.
Snowball
- Benefit: Provides quick wins.
- Benefit: Builds confidence in your ability to pay off larger debts.
- Drawback: Pay more interest overall compared to debt avalanche.
- Drawback: May take longer to eliminate debt.
When is the debt avalanche method a good fit?
The debt avalanche method takes some patience, especially if your highest-interest debt also has the largest balance. But this strategy can really pay off for those determined to get out of debt while reducing overall interest costs.
It can also be daunting and difficult to stay the course on your biggest bills. If this method gives you pause, debt snowball is another great option.
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