What Is the Debt Avalanche Method?
Getting caught in an avalanche is generally a bad thing—unless that avalanche involves reducing your debt. The debt avalanche method first focuses on paying off debt with the highest interest rate, such as credit card debt or a personal loan. Once that is gone, you move to the debt with the next-highest interest rate, ultimately creating a debt avalanche.
The method differs from two popular debt payoff approaches: the debt snowball method, which pays off your smallest debts first, and debt consolidation, which combines all your debts into one payment. It resembles an avalanche because it speeds up the rate you shed high-interest rate payments.
Benefits of the Debt Avalanche Method
This method puts you on a payment plan, which helps hold you accountable for reducing your debt. Using this method will help cut down on your interest payment amounts. Since you are accruing less interest, it can also help you pay off your debt quicker, which can ultimately lead to a debt-free life.
How Does the Debt Avalanche Method Work?
Here’s how this method for getting rid of debt works.
List all your debts. This may include credit cards, medical bills, auto loans, personal loans or student loans. Write the interest rate and minimum monthly payment next to each debt.
Renumber your list based on which debt has the highest interest rate. Begin putting the most money possible each month toward the debt with the highest interest rate. Keep making the minimum monthly payments on the rest of your debts.
When you pay off the debt with the highest interest rate, shift your most significant payment to the one with the next-highest interest rate. Continue to adjust which debt gets the most considerable monthly payment until all your debts are gone.
Download our Debt Avalanche Method Worksheet to help jump start your debt-free journey.
An Example of the Debt Avalanche Method
Let’s say you bought most of your holiday gifts using a credit card last year. Unfortunately, the 19.99% interest rate on that credit card has sent your monthly minimums soaring. You also have two student loans—one with a 7.5% rate and the other with a 4.99% rate. Your auto loan has a 4.03% rate.
Using the debt avalanche method, you make minimum monthly payments on everything but the credit card, where you pay as much as possible each month even though the balance is not your most significant debt. When the credit card is paid off, you shift to paying the most on the student loan with the higher rate, the second student loan and finally, your auto loan.
Who Should Use the Debt Avalanche Method?
Is the debt avalanche method the right move for you? It works best for people who:
Have a lower income and want to save on future interest payments
Don’t mind working toward long-term goals
Have debts with high interest rates
This method may not work well for those who prefer to see immediate results or have trouble sticking to disciplined plans.
Implementing a strategy helps pay down debt faster so you can move on to other goals, such as buying a house. Have questions about how the debt avalanche method works? Contact our team to learn more.
