Pay Off Faster and Save: How to Use the Debt Avalanche Method
7 MIN READ
Published September 29, 2023 | Updated November 10, 2023
There’s no right or wrong way to pay off debt. What works for one person may not work for you. If you’re finding it challenging to get out of debt, consider the debt avalanche method, which prioritizes paying off your most expensive debts first.
The average American has a debt balance of $90,460, which includes student loan debt, personal loans, and credit cards. With the debt avalanche method, you’ll not only be able to pay off your debts faster but will also be able to save money on interest.
What Is the Debt Avalanche Method?
Debt avalanche is a debt payoff strategy that targets debts with the highest interest rate first. The goal of this method is to help you save money and to do this, you’ll start paying as much as you can towards the debt with the highest APR. At the same time, you’ll make minimum payments on all your other debts. You’ll repeat these steps until you are debt-free.
How Does It Work?
If you have a lot of unsecured debts and you don’t think you’ll be able to pay them off in under five years, it may be time to explore debt relief. But more often than not, you may be able to pay off your debt simply by making a budget, reducing expenses, and freeing up some cash that you can use to implement a payoff strategy like debt avalanche. Here’s how it works:
- To use this method, you’ll make a list of all your debts, starting with the highest interest rate to the lowest.
- Specify the minimum monthly payment for each debt.
- Make a budget to see how much you can pay on your debts other than the minimum.
- Use all the money you can find to accelerate paying off the debt with the highest interest rate.
- Continue to make minimum payments on the rest.
- Once you knock it off, use those funds to tackle the next debt on your list until you pay off all your debts.
Use a debt payoff calculator to see the amount of time it’ll take for you to pay off all your debts based on your budget and any extra payments you can make towards your debts.
Before you decide to pay off debt with the avalanche method, it’s important to weigh the pros and cons to determine if this method is right for your financial situation. Here are the main advantages this strategy offers:
- This method helps you manage high-interest debts, such as credit cards. You’ll want to pay those off at the earliest to save money.
- You may be able to pay off debt quicker than other debt solutions.
Here are the main disadvantages of the debt avalanche strategy:
- If your largest debts have high interest rates, it may take a long time for you to pay them off.
- Slower payoff can sometimes make it difficult for you to stay motivated.
- The option only works if you have debts that allow you to pay more than the minimum due on the debts.
- The method may not be right if you’re able to pay more than the minimum on all your debts.
Avalanche vs. Snowball Method
The debt snowball method means paying off your smallest debts as fast as possible. Once the lowest balance is paid, you use the money you were paying towards it to pay off your next-smallest balance. You’ll continue this process until you pay off all your debts.
The debt avalanche focuses on paying off the balances with the highest interest rate first. When that is paid off, you use the money to pay off the debt with the next highest annual percentage rate (APR) until you pay off all your debts.
If you like to see quick progress, the debt snowball strategy can give you a boost of motivation. The avalanche method helps you save some money, but if the debt is large, it may take longer for you to pay it off, and it may be discouraging to stick to the plan.
“Both methods are effective and work!” says Teresa Dodson, debt expert and founder of Greenbacks Consulting. “You just need to budget and evaluate what works best for your situation and what you can stay committed to,” Dodson encourages.
4 Tips for Using the Debt Avalanche Method
If you’re planning to use the debt avalanche method, consider implementing these four tips to increase your chances of success.
1. List Your Debts
Start by making a list of all the types of debts you have. This can include:
- Credit cards
- Medical bills
- Personal loans
- Auto loans
- Student loans
List the outstanding debts, interest rate, names of lenders, and minimum monthly payments for each debt, along with the date on which the payment is due.
2. Prioritize High Interest Rate Debts
Arrange all your debts from the one with the highest interest rate to the lowest. This will help you prioritize debts and figure out which one you should focus on first. The debt avalanche method works by paying off the loans with the highest interest first, so having a list in this order will make the process easier for you.
3. Allocate Funds
Once you have your list ready, focus on paying off the debt with the highest interest rate. Be sure to continue making minimum payments on all other debts so you can avoid a hit to your credit score and keep your accounts in good standing. Use every spare dollar you can find to pay down the most expensive debt. Use your tax refund, bonus, and windfalls for debt repayment. Consider starting a side hustle so you can use the extra money to make additional payments on the debt, which can help you get out of debt sooner.
4. Repeat Your Methods
Once your first debt is paid off, don’t stop there. Focus on paying off the debt with the next highest interest rate. Since you’ll no longer be making minimum payments on the debt you’ve already paid, you’ll have more money for debt repayment. Continue this process until you’ve paid off all your debts.
Success Story: Paying Off $ 50,000 in Credit Card Debt
Let’s consider an example to see how you can pay off a large amount of debt with the debt avalanche method. For this example, consider that you have a total of $50,000 in credit card balance across five credit cards:
- Credit card 1: Amount owed $10,000, APR 18.9%, minimum payment $400
- Credit card 2: Amount owed $7,000, APR 17.5%, minimum payment $280
- Credit card 3: Amount owed $12,000, APR 20.72%, minimum payment $480
- Credit card 4: Amount owed $8,000, APR 18.65%, minimum payment $320
- Credit card 5: Amount owed $13,000, APR 20.49%, minimum payment $440
The minimum payment on all cards combined is $1,920. You make a budget, take on a side hustle for extra cash, and determine that you can afford to pay $2,000 towards your debt payment. With the debt avalanche method, you’ll pay the minimum due on each card and then pay $80 extra on card 3, which has the highest credit card interest at 20.72%. It should take you 28 months to pay off that debt.
Once that is paid off, you start paying $1,000 on credit card number 5, which is the next most expensive debt on your list. You continue making minimum payments on credit card 1, credit card 2, and credit card 4. You’ll continue this method until you pay off the balance on credit card 2, which has the lowest interest rate. Following this strategy, you may be able to pay off all your credit cards in 33 months. Paying off such a large debt is no easy feat. You’ll need consistency and dedication and will have to make extra payments to make it happen.
Is the Debt Avalanche Method Right For You?
The debt avalanche is the most logical and the cheapest way to become debt-free, but it may take you a long time to see a debt fully paid off, especially when your most expensive debt is the largest. You can use a debt payoff calculator or use a spreadsheet to track your progress and stay motivated. But if you stop midway, you may lose the benefit you would’ve gained. This method may be right for you if you are extremely motivated and determined to stick to the plan until the end.
The Bottom Line on the Debt Avalanche Method
The debt avalanche method can help you save money on interest charges, but whether it’s right for you will depend on your financial situation and personal preferences. Remember that there are other debt relief options to consider if this is not the right strategy for you, such as a debt consolidation loan, credit counseling, debt management plan, balance transfer, and debt settlement.