Debt avalanche: A way to pay off debt

Frustrated man calculating billsImage: Frustrated man calculating bills

In a Nutshell

The debt avalanche method of eliminating debt focuses on paying off your highest-interest balances — your most costly debt — as quickly as possible.
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Mathematically, the debt avalanche is known as a more efficient, cost-effective and often faster way to get out of debt than other approaches to debt reduction.

With the debt avalanche method, you pay as much as possible toward your highest-interest debt, while making minimum payments on the rest, until all your debt is paid off. If your high-interest debt is weighing you down, this could be a good solution to becoming debt-free.

What is the debt avalanche method?

The avalanche method prioritizes paying off your debt balances with the highest interest rate or APR. You begin by paying your highest-interest-debt balance first. Once you eliminate that balance, you take the funds you’d been using for those payments and put them toward your next-highest-interest balance, all while making the minimum payments on the rest of your debt.

The idea is to repeat this process until all of your debt is paid off. This method helps you save money by getting rid of the costliest debt first.

How to use the debt avalanche method

Before you begin, review your budget to figure out how much cash you can put toward your debt.

Once you know how much money you can budget to pay off debt, make a list of all of your balances. List them in order of highest to lowest interest rates. Be sure to note the current minimum payment required for each balance.

Next, make all minimum payments on your balances and put any leftover money toward the balance with the highest interest rate. After the balance with the highest interest rate has been completely paid off, move on to the next-highest-interest-rate balance — again, putting as much money as you can toward it.

For example, let’s say you currently have the following four debt balances:

  • A $1,000 credit card balance with a 15.6% interest rate
  • A $2,400 credit card balance with a 12.5% interest rate
  • A $15,000 car loan with a 6.5% interest rate
  • A $500 personal loan with a 5% interest rate

Since the credit card with the $1,000 balance has the highest APR, you’ll want to start there when following the debt avalanche method.

After you have paid off the $1,000 balance, move on to the balance with the next-highest interest rate — the $2,400 credit card balance. You’d continue this pattern until you’re debt-free.

Advantages of using the debt avalanche method

The debt avalanche method can help you save money on interest. If you have large debt balances with high interest, this could be a great strategy to help you save the most money.

Alternatives to the debt avalanche method

Logically, it would make the most sense to select a debt-repayment strategy that would save you the most money. But sometimes paying off debt isn’t just about the math. There are psychological factors that may play a role in the success of any debt-repayment method.

Every time a debt balance has been paid off, you feel a sense of accomplishment and pride. This can help motivate you to stick to your debt-repayment strategy. Repaying small balances fuels the commitment to keep up the good work. If you are someone who is motivated by little wins, this approach — known as the “debt snowball” — may be a better debt-repayment approach for you. Using a debt repayment calculator can also be useful for planning a debt repayment strategy.

About the author: Ashley Chorpenning is a personal finance writer and content creator. In addition to being a contributing writer at Credit Karma, she writes for solo entrepreneurs and Fortune 500 companies. Ashley has a Bachelor of Bu… Read more.