The debt avalanche method involves paying off debts in order of highest to lowest interest rate: Pay the minimums on all debts, but add any extra money you can to the balance with the highest interest rate.
It’s a good option for people keen on reducing the overall cost of exorbitant interest. But focusing first on a high-interest loan that also has a big balance can feel daunting.
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.
“Mathematically, paying off your highest-interest debt first will save you the most money over time,” Robert Finley, a certified financial planner in Chicago, said in an email interview.
The downside is it can take a while to knock out the first balance if it’s large.
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 next debt on your list.
Leave room for emergency savings, Finley said. An unexpected medical bill or car repair could otherwise send you back to borrowing.
» 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% interest.
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. With this approach, 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.
Finley mentioned the psychological challenge that can persist with the debt avalanche method.
“If someone's highest-interest debt also has a large balance, it can take a long time to see meaningful progress,” he said. “Some people may lose motivation when they aren't seeing individual debts eliminated.”
If knocking out smaller debts in shorter order keeps you going, the debt snowball method may be a better fit.
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Benefits and drawbacks of each method
Avalanche
Benefit: Save more money on interest.
Benefit: Can lead to faster debt payoff.
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: May pay more interest in the long run.
Drawback: May take longer to eliminate debt.
When is the debt avalanche method a good fit?
This method makes a lot of sense if you can stay focused on interest savings, even when dealing with a large first balance. Finley said people should think more about math than the size of the balance.
“Every additional dollar used to pay down the highest-interest debt reduces future interest expenses, even if it takes years to eliminate the balance entirely,” he said.
