How Does the Debt Avalanche Method Work?

Tackling high-interest debt may save you money over time


If you’re looking for a strategic approach to pay off debt, you’ll find there’s more than one way to go about it. For some people, the debt avalanche method is the preferred option. It involves making minimum payments on all your debts while paying extra on the account with the highest interest rate. 

There are other debt payoff strategies out there. But the debt avalanche method can lead to paying less interest overall, which can help you save money in the long run as you pay off your debt.

The Debt Avalanche Method Explained

The debt avalanche method—also known as the highest interest rate method—starts by making a list of your debts based on their interest rates, from highest to lowest. You’ll put money toward the balance that has the highest interest rate first. And strategically make additional payments as you’re able.

Once your debt with the highest interest rate is paid off, those extra funds can then go toward the next highest interest loan. And, like an avalanche, your extra payments can grow along the way as you cross debts off your list. 

Here’s how you can get started using the avalanche method:

1. List Your Debts From Highest to Lowest Interest Rate

Create a list of all your debts and their total balances, monthly payments and interest rates. These could include credit cards, personal loans, auto loans, student loans and medical bills. 

Order the list based on the debts’ interest rates, from highest to lowest. Using a spreadsheet may make it easier to change the numbers later. 

2. Make a Budget

You’ll want to make more than the minimum payment on your highest interest account first. So it may help to create a budget to see how much more you might be able to pay toward your debt each month. Especially since every extra little bit can help speed up your payoff.

3. Pay More on Debt With the Highest Interest Rate

Now review your budget to see how much money you can put toward the loan on the top of your list, while still making minimum monthly payments on the rest. 

Credit cards generally charge interest, calculated daily or monthly, depending on the card. So paying down the balance can lead to less interest accruing. 

4. Increase Your Extra Payments as You Pay Off Debts

It might take some time to feel like you’re making progress. Especially if the debt that has the highest interest rate also has a high balance. But don’t get discouraged, the math is on your side.

After you pay off your first debt, apply that entire monthly payment you were making toward your next debt. Over time, all those extra payments will build, helping speed up your debt payoff process. 

The Debt Avalanche in Action

Wondering how this might work? Here’s an example of how someone could use the avalanche method to pay off their debt: 

Account Type Interest Rate Minimum Monthly Payment Balance
Credit Card 1 24% $100 $3,000
Credit Card 2 16% $130 $4,000
Student Loan 4% $122 $10,000
Car Loan 3% $218 $7,500
Medical Bill 0% $125 $1,500
Total Minimum Due   $695  

 

In this example, credit card 1 has the highest interest rate. So any extra money you have will go toward that bill first. And you’ll still continue making the minimum monthly payment on all the other loans. 

Once the first credit card is paid off, you can focus on credit card 2. Now, you’ll pay $230 each month—the $130 minimum payment plus the $100 from the debt you just paid off.

Once both credit cards are paid off, this process is repeated with the student loan, the car loan and then the medical bill

Throughout this process, be sure to make on-time minimum payments on the rest of your loans to avoid late payment fees or impacts to your credit score.

Other Ways to Reduce Your Debt

The debt avalanche method can help you save money while paying off debt. But it isn’t the only strategy, and it might not be the best approach for everyone. Consider other options and how you could use them instead of—or in combination with—the debt avalanche method.

The Debt Snowball Method

Using the debt snowball method, you’ll focus on the debt with the lowest balance first, rather than the highest interest rate. This approach could help you stay motivated to put extra money toward your loans because you’ll pay off smaller, individual debts more quickly.

Debt Consolidation

Consolidating your debts could be a good option if you have several different types. You can take out a personal loan to pay off all your outstanding debt, then make one payment to your new personal loan. This can help streamline your debt, giving you one due date and payment instead of many. 

This may be a good option if you can get an interest rate lower than what you’re paying now. Otherwise, it might not be worth consolidating. Instead, you may want to explore other cost-saving options.

Consider a Balance Transfer 

A balance transfer is often used to transfer debt from high-interest credit cards. It lets you move unpaid debt from one or more accounts to a new or different credit card. It can help you consolidate debt or get a lower interest rate, which could help you pay off your debt faster.

Just be sure to review all the terms and conditions before applying. Especially since there may be fees associated with a balance transfer. Plus, you’ll want to check what interest you could be charged once the introductory interest rate ends. And keep in mind how canceling any old cards might affect your credit score.

Work With a Credit Counselor 

If you’re struggling to make payments on your bills or outstanding debt, consider working with a credit counselor. Many credit counseling agencies are nonprofits and may offer a free or low-cost review of your finances as well as suggest debt-reduction strategies. 

These agencies can also contact lenders on your behalf to help work out payment plans, or help you create a repayment strategy and a budget that fits your current needs. 

Monitor Your Credit to Understand Your Options

Many of your debt-reduction options can depend, in part, on your credit. Monitoring your credit reports and scores can help you know when it might be a good idea to look into refinancing debt or whether you’re likely to get approved for a credit card with an introductory 0% APR offer. 

When it comes to monitoring your credit, CreditWise from Capital One lets you monitor your TransUnion® VantageScore® 3.0 credit score. It’s free for everyone—not just Capital One customers. And checking won’t hurt your score, so you can check it as often as you like. You can also use the Credit Simulator to see how different actions could impact your credit score. 

You can also get free copies of your credit reports from each of the three major credit bureaus by visiting AnnualCreditReport.com. There may be a limit on how often you can get your report, so be sure to check the site for more details.

The Best Debt Payoff Strategy Is the One You Use

As is often the case with personal finances, the best option will often depend on your unique circumstances. For example, if you’re hoping to overcome financial anxiety about your debt, the psychological benefit of getting quick wins with the debt snowball method may make it the best option. But if you’re driven by paying the least amount of interest in the long run, the debt avalanche method may be the way to go. 

Just remember, there’s more than one method that can help you pay off debt. Consider your unique financial situation and the different types of debt you have to help you choose which approach to take.


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