Debt Avalanche Method: What To Know and How To Start
- The debt avalanche method is a debt prioritization strategy that works by paying off your debts one at a time from highest to lowest interest rate or APR.
- You’ll make minimum payments on all your debts while putting extra money toward the debt with the highest interest rate every month. Once it’s paid off, you’ll move to the debt with the next-highest rate.
- The debt avalanche method can help you save money on interest and get out of debt sooner, but it takes dedication and discipline.
What is the debt avalanche method?
The goal of the debt avalanche method is to save money on interest and get out of debt faster by targeting debts with the highest interest rates first.
You’ll make more than the minimum monthly payment on your debt with the highest APR or interest rate. At the same time, you’ll continue making minimum monthly payments on your other debts.
Once you’ve paid your highest-interest debt, you’ll move on to the debt with the second-highest interest rate. If you have two bills with the same interest rates, focus on the one with the highest balance first. Repeat these steps until you’re debt-free.
How to start the debt avalanche method
1. Gather your bills
To get started on the debt avalanche method, take account of who you owe, how much you owe and how much interest you’re paying. Get all your bills together in one place and write down your average APRs, minimum monthly payments and total balances.
2. Create a worksheet
Next, create a way to keep track of your payments. You can create a worksheet or a simple list by following the example below.
When filling in your list, sort your debt from highest to lowest APR or interest rate.
The figures in the “current payment” column should match what’s shown in your “minimum monthly payment” column, with the exception of your highest-interest debt. Here, you’ll also include whatever additional payment you’d like to make above the minimum.
Here’s a hypothetical example to show you what your list or spreadsheet should look like:
| Bill | Average APR or interest rate | Minimum monthly payment | Current payment | Balance |
|---|---|---|---|---|
| Credit card #1 | 22% | $150 | $150 + $100 extra | $5,000 |
| Credit card #2 | 20% | $60 | $60 | $2,000 |
| Personal loan | 15% | $238 | $238 | $10,000 |
| Auto loan | 7% | $600 | $600 | $35,000 |
| Student loan | 6% | $311 | $311 | $28,000 |
3. Make monthly payments
Now that you’ve organized your debt, continue to make minimum monthly payments but put extra cash toward your debt with the highest APR. For example, based on the worksheet above, our hypothetical borrower has committed to paying an extra $100 per month toward their highest-interest debt.
Continue down your worksheet, picking off your highest-interest debt until you have nothing left to pay.
The debt avalanche method works when you stick to it. You’d save $5,585 in interest and pay off your debt four years sooner by using the avalanche method instead of making minimum payments on the debt in the example worksheet above.
Pros and cons of the debt avalanche method
The debt avalanche method can save you money on interest, but it does take a lot of willpower.
Depending on the balance of your highest-interest debt, you could be paying it (and your other debts) for a long time before fully paying anything off. So you’ll save money on interest and be out of debt quicker — but it may feel like a slog if you’re chipping away at the same debt over a long period of time.
Pros
- Saves money on interest
- May pay down debt quicker than other repayment strategies
- Doesn’t require a hard hit to your credit like debt consolidation or a balance transfer credit card
Cons
- Can be hard to stay motivated if your highest-interest debt is also the one with the highest balance
- Not an option if you can’t afford at least the minimum amount due on all your bills
- Only works if you’re able to pay more than the minimum amount due on your highest-interest debt
Debt avalanche method alternatives
The debt avalanche can be an effective strategy to get out of debt, but it’s not the only one. Consider all of your options to make an informed decision about which strategy best fits your lifestyle and budget.
Debt snowball method
The debt snowball method is similar to the debt avalanche method, but with one major difference. Rather than focusing on your highest-interest debt, you’ll target your smallest debt with the lowest balance. Once that’s paid off, you’ll move on to the debt with the next-smallest balance and so on.
Psychologically speaking, many people find the debt snowball method easier to stick to than debt avalanche. By its very nature, debt snowball comes with the “easy wins” of paying off your low-balance debts quickly.
Debt consolidation
A debt consolidation loan is a personal loan you use to pay off outstanding debt. These are best for borrowers with lots of high-interest credit cards or those who are struggling to juggle many debt-related bills.
Balance transfer credit card
If you have good or excellent credit (a FICO Score of 670+), look into transferring your high-interest credit card debt to a 0% interest balance transfer credit card. As long as you pay it off during the introductory period, you’ll pay nothing in interest. These cards typically come with a fee (3 to 5% of the balance you transferred).
Debt management plan
If you want to get rid of your debt (and the habits that got you into debt in the first place), consider working with a credit counselor to create a debt management plan. For a small fee, your credit counselor can help you put a debt repayment plan into place and teach you healthier spending habits.
Keep in mind that you won’t be able to use your credit cards while you’re working through a debt management plan (which can take three to five years).
Debt relief
Debt relief — also known as debt settlement — involves working with a company that negotiates your debt with your lenders on your behalf. Settlement comes with downsides like damage to your credit, and it’s important to vet your debt settlement company to make sure it’s legitimate.
But for overwhelmed borrowers, a reputable debt relief company may be able to negotiate down and consolidate debt to a more manageable level.
How to decide if the debt avalanche method is right for you
If high-interest debt is nagging at you, consider the debt avalanche — you might not feel as fulfilled using the debt snowball, which focuses on smaller balances, not higher rates. Both of these strategies are a bit of a motivation mind game. With the avalanche, you can go to sleep at night knowing that you’re targeting your higher-interest debt. This alone can help you stay the course.
Choose the debt avalanche method if your top priority is to save money on interest and get out of debt as soon as possible. You’ll need to be committed, since it could take time to see progress in paying off your debts.
If you think you’d be more motivated with the quick initial wins that come with paying off your smallest debts first, choose the debt snowball method. And if your debt is keeping you up at night, see what you can save with debt consolidation or make an appointment with a credit counselor to review your options.
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