Debt avalanche is a strategy of paying off what you owe by prioritizing loans and credit card balances with the highest interest rates. The goal is usually to minimize the amount of interest you pay, and this approach might help you pay off debt faster than other strategies like the debt snowball. If you’re serious about eliminating debt and minimizing interest costs, you may want to use the debt avalanche method of debt payoff.
Debt Avalanche Method of Paying off
Here’s how to save the most on interest with the debt avalanche method:
- Take inventory: Gather a list of everything you owe. List your debts in order of the interest rate on each loan or credit card, starting with the highest rate and working down to the lowest.
- Pay your minimums: Keep making minimum payments on all of your loans or credit card balances. You’ll focus on one balance at a time, but you need to stay current on the others to avoid fees and damage to your credit score.
- Pay extra on the highest rate: With any additional money you have available each month, pay extra on the loan with the highest interest rate. You’re reducing the amount you owe at that high rate.
- Build momentum: Once you pay off a loan, cross it off the list and move on to the loan with the next highest interest rate. The previous loan’s minimum payment (which you no longer need to pay) becomes available for additional debt payments.
Why It Works
The debt avalanche is an effective strategy because it focuses on interest rates. On most loans, a portion of each monthly payment goes toward interest charges, and the remainder reduces your loan balance. With high rates, you need to pay more to cover interest costs, and your payment might only make a small dent in your loan balance. By minimizing your overall interest rate, you spend less money on interest.
Who Is a Debt Avalanche Best For?
The debt avalanche might be a good fit if you:
- Want to minimize your total cost of borrowing
- Believe in the logic behind the strategy (paying as little interest as possible)
- Have the discipline to keep paying extra on a sizeable debt for an extended period—without the satisfaction of seeing it paid off quickly
- Don’t need positive reinforcement frequently (or early in the process)
- Are motivated by facts and figures.
Is This the Best Strategy?
The debt avalanche is an excellent strategy for minimizing costs and getting out of debt. However, it’s wise to scrutinize any strategy before following it.
Debt snowball? With the debt snowball method, you pay off your debts in order of size, from smallest to largest. The idea is that having small wins early on helps motivate you to stick with your debt reduction plan, but this method could end up costing you more in total interest. For some, a debt snowball strategy might be a better option. That’s particularly true if you’re likely to lose motivation during your debt elimination journey. With a debt avalanche, you need to trust that it’s “best” to pay down loans with high rates. And it might take a long time before you pay off a loan.
Debt snowball and debt avalanche are both useful. And wiping out debt is the most important outcome.