Debt Avalanche – The Best Method for Eliminating Debt
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Fast Facts
Definition:
Focus on paying off highest-interest debts first.
Primary Goal:
Save money on interest and reduce overall debt faster.
Key Steps:
Pay minimums on all debts, put extra money toward the highest-interest debt, and repeat with the next highest-interest debt.
Benefit:
Reduces the total amount paid in interest over time.
Even if you haven’t seen the movie “Frozen,” you’ve heard the song “Let It Go.” That’s precisely what you want to do, right? You want to “let go” of all the debt weighing you down and finally feel free.
Funnily enough, the possible solution to your problem also (kind of) involves snow. If you’re looking for a way to reduce debt, I think the debt avalanche method is one of the best ways to become debt-free. Let’s get started!
In this article
What is the debt avalanche method?
When you first begin your journey to becoming debt-free, you’ll discover there are two main debt repayment methods to consider. They are:
- The debt avalanche method. This focuses on paying down the debt with the highest interest rate first
- The debt snowball method. This focuses on paying down the smallest debt first
The method you choose depends on the type of debt you’re dealing with. In this article, I’ll focus on the debt avalanche method.
You'll save more money on interest payments over time by focusing on paying down the high-interest debt first (while keeping up with the minimum payments on all the others, of course).
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How to start the debt avalanche
The debt avalanche method will help you eliminate debt faster. It involves these four steps:
- Keep paying the minimum monthly payments on ALL your other debts.
- Identify which of your debts has the highest interest rate.
- Use any extra money first to pay off your debt with the highest interest rate.
- Once this debt is paid off in full, repeat Steps 1-3 for the debt with the next highest interest rate.
Let’s break it down even more.
Keep paying all your minimum payments
The first thing to remember: You’ll want to stay on top of all minimum payments and any new debt you might accrue. Some debt is good for building your credit score, such as taking out a loan to buy a house. But keep paying minimum payments and avoid large, unnecessary purchases to stop your debts from spiraling out of control.
Make a list
The next step is to make a list. Look at all your debts and list them by interest: debts with the highest interest rate first, down to those with the lowest interest rate. Pinpoint the largest out of all of them and then pay that off first.
For example, your list might look like this:
- $7,000 credit card balance with a 25% interest rate
- $4,000 personal loan with a 10% interest rate
- $175,000 mortgage with a 2.99% interest rate
Make a budget
Figure out how much extra funds you can spare, then use that to pay off your highest-interest debt.
Let’s imagine you trim some expenses (like weekly takeout), so you have $650 extra each month to pay off your debts. In the above example, you’d use that monthly $650 to make extra payments on your credit card balance. You’d start paying down your credit card balance because it’s your debt with the highest interest rate.
When your credit card is paid off after a little over a year, you will start paying extra on your personal loan because it has the second highest interest rate. Lastly, you’d pay off your mortgage because it has the lowest interest rate.
Notice that even though your personal loan has the smallest balance, you pay it off before your mortgage because it has a higher interest rate. The same would go for a student loan — even if a student loan is larger than a credit card balance, the interest rate is usually much lower, making that less of a priority to pay off than a credit card.
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Resources to eliminate your debt
If you find yourself in a position where you feel like you can’t escape your debt, you might consider a debt tracker, debt reduction software, or even a debt relief program to get you started.
Debt trackers
A debt tracker is any tool that helps you keep track of your debt. Anything from a simple notebook to something high-tech like a spreadsheet, calculator, or app. You'll want specific information in your tracking data when looking for a debt tracker. The biggest ones include account names, interest rates, balances, minimum payments, and payment due dates. By having this data organized and readily available all in one place, you’ll start to feel a sense of control over your personal finance.
Vertex42 Debt Reduction Calculator is a noteworthy debt tracker to consider. It’s a free online calculator that offers free downloadable calculators for Microsoft Excel or Google Sheets. Using this could help you boost your credit score by paying down your debts faster, and it has multiple calculator types to choose from.
Image source: Vertex42
This Credit Card Payoff Calculator works great for the debt avalanche method because it helps you better visualize the payments you’ll need to make to pay off a debt by a certain date, i.e., in five years or less. For example, if you are trying to pay off a $7,000 credit card balance with a 25% interest rate, you could pay it ALL off in a little over a year if you make monthly payments of $650. (This doesn’t take into account additional purchases, late feeds, etc.)
Debt relief
Debt relief is the act of reorganizing your debt to give those you owe at least some measure of debt repayment, either in part or in full. For unsecured debts, such as credit card debt or a personal loan, if you can’t see yourself being able to pay these off in five years or less, a debt relief program may be something to consider.
Many companies provide debt relief services, such as Freedom Debt Relief (FDR), National Debt Relief (NDR), and CuraDebt. Other types of debt relief can include:
- Balance transfers: Opening a new balance transfer card allows you to transfer your debt balance, resulting in faster credit card payoffs. Most balance transfer cards start with a 0% introductory annual percentage rate (APR).
- Bankruptcy: Best for those whose debt has become overwhelming and impossible to repay. There are many different types, all named for the chapter in which they appear in the U.S. Bankruptcy Code book. For personal bankruptcy, you’ll be filing for either Chapter 7 or Chapter 13, depending on your situation.
- Credit counseling: Best for those who don’t know how to begin confronting their debt. Usually involves meeting with a trained professional to evaluate your specific situation. This may lead to starting a debt management plan (see below).
- Debt consolidation: Best for those wanting a long-term solution. This usually involved getting a personal loan with a consistent monthly payment and a lower, fixed interest rate. You would use that loan amount to pay off your other debts, thus consolidating your debts into one monthly payment and a fixed interest rate.
- Debt management plans: Various plans allow you to pay back your unsecured debt in full with either a reduced interest rate or completely waived fees. The agency you choose should be accredited by either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
- Debt settlement: Best for those who have recent debts, charged off accounts, or accounts in collections. This allows you to settle your debt for less than what you actually owe so long as you pay back this new settled amount in full. But this should only be a last resort option. Beware of scams!
Keep in mind, some debt relief programs can hurt your credit score (like bankruptcy) or may cost money (like credit counseling). You should also be careful to work with a reputable company and complete whatever debt relief program you enter so you don’t end up with even more debt than before.
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- Subject to qualification and approval. $1,500 monthly income required.
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Costs and fees
Between the debt avalanche method and the debt snowball method, the avalanche method is best at saving you the most money over time. To understand why let’s revisit the example from above:
- $7,000 credit card balance with a 25% interest rate
- $4,000 personal loan with a 10% interest rate
- $175,000 mortgage with a 2.99% interest rate
Let’s say you have an extra $650 to put toward debt repayment each month. Following the debt avalanche method, you’ll first focus on your credit card balance. Using the extra $650 monthly to pay off your credit card balance, you could conceivably pay off your credit card debt in a little over a year. By the end of the year, you will have only spent a total amount of $1,009.13 in interest.
In contrast, imagine you pay only $150 on your credit card each month — barely more than what you owe in interest each month. It would take almost 15 years to pay off the whole balance, and you will have paid over $19,000 in interest during that time.
If you followed the debt snowball method, you would try to pay off your personal loan before any other loan, because that is the smallest loan amount. However, in doing so, your other debts would continue accruing interest. For your credit card, that would be over $145 every month!
Pros and cons
Pros
- The debt avalanche method stops compound interest growth and saves you the most in interest.
- It provides a sense of control when you succeed in paying off such a large debt.
- Best for people who are patient, analytical, and value long-term results.
Cons
- Your first debt may feel overwhelming to tackle, especially if it is very large.
- It assumes constant extra cash will be available and does not account for increased expenses and emergencies.
- It takes a long time and requires patience rather than short-term victories, resulting in some people quitting prematurely.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
FAQs
Is the debt avalanche method right for everyone?
The debt avalanche method is ideal for those who are disciplined and focused on long-term savings. However, individuals who need quick wins to stay motivated might prefer the debt snowball method.
What are the drawbacks of the debt avalanche method?
The main drawback is that it may take longer to see progress compared to the debt snowball method, which can be less motivating for some people.
How do I stay motivated using the debt avalanche method?
To stay motivated, track your progress regularly, celebrate milestones, and remind yourself of the long-term financial benefits of reducing your overall interest payments.
Can I combine the debt avalanche method with other strategies?
Yes, you can combine the debt avalanche method with other strategies, such as creating an emergency fund or using balance transfers to lower interest rates.
What are the benefits of the debt avalanche method?
The primary benefit is that it reduces the total amount paid in interest over time, helping you pay off your debts faster and saving you money.
The bottom line
Reduced debt and a decent emergency fund are something everyone wants. Fortunately, there are many methods to help you. While it requires patience, the debt avalanche is the method that will help you save the most money on interest payments. If you stick with it, you will see results that put you on a path toward your ultimate goal — finally becoming debt-free.
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Writer
A veteran wordsmith and research nerd, Brittany Wren spent a decade working in higher education where she helped people overcome challenges to chart a path forward. These days, she writes about personal finance, careers, parenting and education. Her content has been published by a wide variety of brands including T-Mobile, Intuit, LifeLock, Reliant Fund Administration and CURO Financial Technologies Corp.
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