The debt avalanche is a strategy for paying off debt by tackling the debt with the highest interest rate first. You’ll eliminate your most expensive debt first, so you’ll pay less in interest over time than you would with other debt payment methods.
How the Debt Avalanche Method Works
To apply the debt avalanche method, you’ll pay off the debt with the highest interest rate first, then move on to the debt with the next highest interest rate, until all debts are paid off. Logically, it is simple, but it will take some planning to keep track of your interest rates.
Steps of the Debt Avalanche Method
To apply the debt avalanche method follow these steps:
- Make a list of your debts.
- Arrange the list by interest rate or APR, with the highest rates first.
- Pay the minimum on all debts except the one with the highest interest rate or APR.
- Pay the remaining funds you have available to the highest-interest debt.
Once the first debt is cleared, move on to the debt with the second-highest interest rate, and continue until you have paid off all debts.
How to check interest rates and APR
Be sure to check the current annual percentage rate (APR) and any possible changes to APR. The easiest way to check the APR is to call the credit card company or lender and ask. You can also find the rates online or in your personal online banking portal.
Be sure to read the fine print!
Some credit cards will have an introductory APR of 0% for a limited time, but then the APR will change to some higher amount. Credit cards will also sometimes have a variable APR based on your total debt, credit score, or income. You will also need to check the APR or interest rate for all other debts.
How to Apply the Debt Avalanche
Once you know the APR or interest rate of each debt, follow the steps listed above and create a list from highest interest rate to lowest. Don’t include a mortgage in the list. A sample list might look like this:
- Credit card 1: 21.99%
- Credit card 2: 18.99%
- Personal loan: 10%
- Auto loan: 7%
- Student loan: 4%
With this list, you would start by paying off the credit card with the highest APR first, while paying the minimum monthly payments on all other debts. Once the first credit card is paid off, focus on the second credit card, and keep moving down the list until all debts are cleared.
Example of the Debt Avalanche Method
Suppose you have debts on three credit cards, as well as an auto loan and student loans. To apply the debt avalanche method to eliminate debt, you would start by creating a list of debt amounts and APR or interest rates, like this:
- Credit card 1 – 21.99% APR – $3000
- Credit card 2 – 18.99% APR – $2000
- Auto loan – 5% APR – $4000
- Student loan – 3% APR – $30,000
Now, look at the minimum payments each month to plan how much you can pay to credit card 1. Minimum payments could look like this:
- Credit card 1 – $100
- Credit card 2 – $60
- Auto loan – 5% APR – $300
- Student loan – 3% APR – $400
Therefore, the total you will need for minimum payments is $860. If you have $1700 per month to pay off debt, your payments with the debt avalanche method would start like this:
- Credit card 1 – $940
- Credit card 2 – $60
- Auto loan – 5% APR – $300
- Student loan – 3% APR – $400
With the debt on the credit card with the highest APR, within 4 months you will have paid off the first credit card and be able to move onto the second credit card.
Advantages of the Debt Avalanche Method
The primary advantage of the debt avalanche method is that you will be able to save money on interest and pay off all debts more quickly. By prioritizing the highest interest rates, you pay less in interest as the months go by. As you see the high-interest charges reduced each month, you can apply those savings to pay off additional debts.
From a financial perspective, the debt avalanche method is the most intelligent way to pay off debt.
Disadvantages of the Debt Avalanche Method
While logically the debt avalanche method makes financial sense, it can be discouraging if the debt with the highest interest rate is also large. It could be months or years before the first debt is paid off with this method.
It can be a challenge to maintain motivation when you don’t feel you’re seeing progress. Some people choose other debt payment strategies, such as the debt snowball method, because it is psychologically motivating.
☝️ Ultimately, the best strategy to pay off debt is one you stick with.
How to Make the Debt Avalanche Work For You
If you want to use the debt avalanche method but are worried about motivation to stick with it, consider listing debts in a spreadsheet and totaling the debt each month. In the example above, the total debt for the three credit cards, plus the auto and student loans would be $39,000. Update the spreadsheet after you make payments each month to see the total debt reduced.
There Is No “Best” Strategy to Pay Off Debt
There are several established strategies to pay off debt. Any of them will work. You need to choose the strategy that best fits your individual needs and situation. Just make sure that you have a conscious strategy that can keep you focused on the goal of getting out of debt.
