The Debt Avalanche Method
How Does the Debt Avalanche Method Work?
The debt avalanche strategy stresses eliminating your highest-interest debt before any other debt. So, if your highest-interest debt is a credit card balance with an annual percentage rate (APR) of 18.99%, you make that debt your primary target, while still making at least the minimum monthly payments on your other debts. Any extra money you identify in your budget goes toward your highest-interest debt—in this case, the credit card with an APR of 18.99%.
Once the credit card debt with the 18.99% APR is paid off, you move to the debt with the next highest interest rate. Let’s say that’s a personal loan with a 10.99% APR. At this stage, you apply the money you were paying on the credit card debt with the 18.99% APR to the personal loan with the 10.99% APR, adding the extra amount to the personal loan’s minimum monthly payment. Again, you keep making at least the minimum monthly payments on all of your other debts.
If you adhere to this strategy, you presumably could erase all of your debts—and in a way that reduces the total interest charges you’ll pay.
To be clear, the “avalanche” part of this debt payoff method refers to your higher interest rate debt quickly crashing down, just as snow, ice and rocks do in an avalanche on a mountainside.
Which Debts to Include in a Debt Avalanche
Which types of debts may be appropriate to tackle in a debt avalanche? Among them are:
Credit cards
Personal loans
Student loans
Auto loans
Medical bills
Again, regardless of the type of debt, you initially zero in on the highest-interest debt before any other debt.
Using the Debt Avalanche Strategy
How do you get started with the debt avalanche strategy? Here are the four steps to take:
1. Make a list of all your debts.
2. Rank the debts from the one with the highest interest rate to the lowest interest rate.
3. Come up with a budget. When you track your income and spending, you can figure out how much extra money—beyond your monthly debt payments—you can allocate toward paying off the highest-interest debt on your list.
4. Once you’ve eliminated your highest-interest debt, shift to the debt with the next highest interest rate. This means layering the amount you were earmarking for the highest-interest debt on top of the regular monthly payment for the debt with the next highest interest rate. Keep up this approach until all of your debts are repaid.
Debt Avalanche Example
Let’s say you have four debts that you want to attack as part of a debt avalanche strategy. Based on the interest rates, here’s the order in which they’d appear, from top to bottom:
In this scenario, you’d focus first on the credit card with the 18.99% APR. If you have an extra $100 a month to put toward debt repayment, you will combine the minimum monthly payment of $120 with the $100 in extra money for a total monthly payment of $220. You’d make that $220 payment each month until the credit card balance goes to zero.
Once you fully pay off the credit card with the 18.99% APR, you’d move on to the 10.99% APR personal loan. You’d combine the $220 a month you had paid toward your credit card debt with the $200 minimum monthly payment for the personal loan, putting a total monthly payment of $420 toward the personal loan.
After you’ve paid off the personal loan debt, you’d repeat the debt avalanche process and move on to the student loan with the 4.99% APR, paying $420 on top of the student loan’s $400 minimum monthly payment. Finally, you’d work on paying off the auto loan with the 2.99% APR. As a reminder, you’d always make at least the minimum monthly payment on all of your lower-interest debts while targeting the highest-interest debt.
Advantages and Disadvantages of Debt Avalanche
One of the main advantages of embracing the debt avalanche strategy is that you’re chipping away at the highest-interest debt before any other debt. In the long run, this could save you a considerable sum of money in the form of interest charges.
Furthermore, the debt avalanche strategy may provide some motivation because you’re getting rid of the highest-interest, most costly debt first. Also, the debt avalanche could be a shorter route to debt-free status than other repayment strategies, because you’ll pay less in interest overall.
However, the debt avalanche method may be disappointing because the highest-interest debt may also be the debt with the highest balance. If that’s the case, it may take a while to see progress and it may be challenging to stick to the strategy.
Research published in 2018 concludes that the debt avalanche method doesn’t offer “significant psychological benefits,” which factors into comparing the debt avalanche with the alternative debt snowball method. However, the report adds that “if the goal is for the individual consumer to simply pay off their debts the most quickly, and the consumer has no motivational or habitual issues that might complicate this, the avalanche…will nearly always be the superior choice.”
Is the Debt Avalanche for You?
If you’re interested in paying off your high-interest debt first and also self-disciplined and self-motivated, the debt avalanche method may be right for you. Why? Because this strategy knocks off high-interest debt piece by piece and can save you money in interest charges, yet it requires patience to carry out—it could take some time to pay off your initial high-interest debt, depending on the size of the balance.