What is the debt avalanche method?
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BLUEPRINT
Updated 5:07 a.m. UTC March 11, 2024
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While it can be tempting to ignore a mountain of debt, implementing a payoff plan can help you take control of the situation. One option is the debt avalanche method, which can save you more money on interest compared to other strategies.
Here’s a closer look at what the debt avalanche method is and how it works.
What is the debt avalanche method?
The debt avalanche method is one strategy you can use to pay off multiple debts. It focuses on targeting your balance with the highest interest rate first, which can help you save money on interest over time.
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How the debt avalanche method works
The debt avalanche method involves putting as much money as possible toward your debt with the highest interest rate while making the minimum payments on your other balances. Here’s how to use it:
- List all of your debts in order of highest interest rate to lowest.
- Calculate your income and subtract your recurring expenses from it (such as rent, utilities, groceries and minimum debt payments). This will show you how much extra funds you have left over.
- Put these extra funds toward the debt with the highest interest rate while making only the minimum payments on your other debts.
- After the debt with the highest interest rate is paid off, move on to the debt with the next-highest rate.
- Continue until all of your debts are paid off.
Debt avalanche example
Say you have five debt balances with a total balance of $27,500, broken down as follows:
| DEBT TYPE | BALANCE | INTEREST RATE |
|---|---|---|
Credit card 1
| $2,000
| 12%
|
Credit card 2
| $5,000
| 18%
|
Credit card 3
| $6,000
| 20%
|
Auto loan
| $9,500
| 5%
|
Personal loan
| $10,000
| 10%
|
In this scenario, you’d focus on repaying the third credit card first since its 20% interest rate is the highest. After you’ve paid off this card, you’d move on to the debt with the next-highest rate — the second credit card. You’d then continue to the first credit card, then the personal loan and finally the auto loan until all of the balances are repaid.
While the personal loan in this situation has the highest balance, you’d still pay it off second to last since it has one of the lower rates out of these accounts.
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Pros and cons of debt avalanche
If you’re thinking about using the debt avalanche method, keep these benefits and drawbacks in mind.
Pros
- Can make the most financial sense: The debt avalanche method can help you save money on interest in the long run because you’ll be paying off the highest-interest debts first.
- Takes the guesswork out of paying off debt: This method also provides a clear plan of action as you make progress toward becoming debt-free.
Cons
- Requires more persistence: The debt avalanche method requires more discipline and patience if the debt with the highest interest rate also has a large balance.
- Might not see progress right away: If your debt is taking a long time to pay down, it can be difficult to stay motivated.
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Debt avalanche vs. debt snowball
The debt avalanche and debt snowball methods are two major strategies for paying down debt. However, they work differently.
With the debt avalanche method, you focus on paying off the highest-rate balance first while making minimum payments on your other debts each month. This strategy can save you money over time because you focus on the debt that costs you the most.
The debt snowball method, on the other hand, has you concentrate on repaying your smallest balance first before moving on to larger amounts. You’ll likely see progress faster with the debt snowball compared to the debt avalanche, which can be helpful if you’re motivated by small wins. However, you generally won’t reduce your interest costs with this method.
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Is the debt avalanche method right for you?
Whether the debt avalanche method is right for you mainly depends on your personality. If you value saving as much in interest as possible, then the debt avalanche method might be a good fit. On the other hand, if you thrive on small wins and need motivation to keep going, then using the snowball method could be more beneficial.
No matter which strategy you choose, make sure to pair it with a budgeting system so you can make sure you’re hitting your debt payoff goals.
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Alternatives to the debt avalanche method
The debt avalanche method isn’t the only method you can use to pay off debt. If it doesn’t appeal to you, consider one of these alternatives instead:
Debt snowball
The debt snowball method is all about getting you amped up to pay off debt. With this method, you pay off your smallest balance first regardless of interest rate, then move on to the next-smallest balance.
Experiencing quick wins by paying off balances quickly can help you stay motivated to keep going. However, a major drawback of this method is that you likely won’t save money on interest.
Debt landslide
The debt landslide method has you list your debts from newest to oldest, then focus on paying off the newest one first. The idea is that some credit scoring systems give more weight to newer accounts, so paying those down first might help to boost your credit score.
Debt consolidation
If you feel overwhelmed by the number of debts you have to pay down, paying them off with a debt consolidation loan could be a good idea. This will leave you with just one interest rate and monthly payment to manage. Additionally, you might qualify for a lower interest rate than what you’ve been paying, depending on your credit score.
However, you could end up staying in debt longer and paying more in interest if you opt to extend your repayment term.
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Frequently asked questions (FAQs)
Not necessarily. While the debt avalanche can help you save money on interest, another strategy might be better for you if you’re motivated by other things. For example, if small wins will help you maintain momentum, then the debt snowball might be a better fit.
The fastest payment method is ultimately the one that you stick with until the end. So while the debt avalanche can minimize the amount of interest you pay over time, it can also take time to see progress. If you’re likely to get discouraged and quit because of this, you might be better off using a different method more suited to your personality.
If you need to boost your credit score to qualify for a better mortgage rate, then paying off credit card debt could be a good idea. This strategy can help lower your credit utilization as well as your debt-to-income (DTI) ratio, which in turn could help you qualify for a mortgage.
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