The Debt Avalanche Method: What It Is and How It Works

Paying off debt can be challenging. But the good news is there are strategies that you can use to pay off debt. One popular method is the debt avalanche method. With this method, you focus on paying off the high-interest debt first, allowing you to save on interest over time.

In this article, we’ll look at how the debt avalanche method works, and compare it to other options, like the debt snowball strategy.

To use the debt avalanche method, you’ll want to start by listing out all of your debt. You’ll then want to focus on paying off the debt with the highest interest rate first. Once you’ve paid off the highest-interest debt, you can move on to the debt with the next highest interest rate, and so on, repeating this process until you pay off all your debts.

When using the debt avalanche method, you still continue to pay the minimum payments due on all debt. This is crucial as it’s important that you don’t fall behind on payments for any of your outstanding debts. However, at the same time, you’ll focus your efforts on paying off the balance on the debt with the highest interest rate. This means you’ll put any extra funds that you have after monthly expenses, savings contributions, and minimum debt payments toward clearing your highest-interest debt.

1. Create a list of your outstanding debt
   Start by listing all your outstanding debt. Debts you may have include:
   
   
   • Credit cards
   • Student loans
   • Auto loans
   • Home mortgage
   • Personal loans 
      
2. Organize the list, prioritizing the highest-interest debt first
   Sort your list from highest to lowest interest rate.
   
   Your list could look like this example:
   
   

   Type of Debt	Monthly Payment	Interest	Total Debt
   Credit card	$150	22%	$3,000
   Auto loan	$218	10%	$7,500
   Student loan	$140	6%	$10,000

   
   This list will tell you what order you may want to pay off your debts in using the debt avalanche method.
   
   
3. Determine whether you will exclude some of the debt
   Some debts with low interest rates or useful purposes may not necessitate payoff.
   
   Mortgages are a good example. They buy you a place to live, which is also an asset that could potentially appreciate over time.
   
   Meanwhile, mortgages can be quite large and have lower interest rates than many other debts. Paying them down as fast as possible may be unrealistic or involve significant financial strain.
   
   Therefore, people far from retirement may decide not to aggressively pursue mortgage payoff to have enough for living expenses and retirement savings.
   
   This varies by your financial situation, though. Consider your goals and circumstances.
   
   
4. Start paying off the debt
   Set all debts, except the highest-interest debt, to minimum monthly payments. Then, put any remaining monthly debt payoff funds in your budget toward paying off your highest-interest debt.
   
   Each time you pay off a debt, move to the next one on the top of the list.

Using the debt avalanche method can be a good debt repayment strategy for some. Here’s a look at the benefits that it offers:

1. Interest savings
   Focusing on the debts with the highest interest rates first can reduce your interest costs over time.¹ Depending on your debts, this could help you to save a significant amount of money over time.
   
   
2. Potentially improved credit score
   Credit cards can be a high-interest form of debt. Therefore, the debt avalanche method may naturally target credit cards first. Paying credit card balances down reduces your interest costs and overall balance, which improves your credit utilization ratio (amount of credit that you’re using as a percentage of your available credit), and, subsequently, could increase your credit score.

The debt avalanche method is not for everyone. Here are a few challenges when following this strategy:

1. Slower momentum than other methods
   The debt avalanche method, you may not experience your first win as quickly as with other methods.
   
   The snowball method is another popular payoff method that involves paying off the smallest debts first, working towards the higher debts. Since you’re paying off smaller balances, you may be able to expect a quicker win with this method than you would with the debt avalanche method.
   
   
2. Payment management may be challenging
   Juggling several debts at the minimum payment while paying off your main debt can be challenging. You cannot forget to make your minimum payments on other debts or you could face late fees and a penalty Annual Percentage Rates (APR). Late or missed payments could also impact your credit score.
   
   
3. Discipline and patience are required
   The debt avalanche method, like many payoff methods, can take time. Succeeding requires discipline and patience, especially with large amounts of debt. Progress can seem slow in the beginning. It requires diligence and patience as paying off debt is a process that doesn’t always happen right away.

Some alternatives to the debt avalanche method are the debt snowball method and the debt snowflake method.

• Debt snowball method
  The debt snowball method entails paying off debts from the lowest to the highest principal balance. This doesn’t save as much on interest but helps pay off the first debt more quickly and gain momentum.
  
  
• Debt snowflake method
  The debt snowflake approach involves making small, frequent payments based on micro-savings to chip away at debt faster.
  
  For example, if you use a coupon to save $5 on a grocery purchase, you’d pay an extra $5 toward your debt.
  
  This method can be combined with the debt avalanche or snowball methods.

Below is a comparison of these three methods side by side:

1. Don’t take on additional debt
   When paying down debt, you’ll want to make sure you’re not increasing the money owed. Commit to not increasing your balances on credit cards or taking on any loans during this period.
   
   
2. Consolidate and refinance
   Consolidating debt involves combining many debts into one to make debt management easier. Refinancing entails paying off one or more debts with a new, lower-interest debt.
   
   You can refinance and consolidate simultaneously, potentially lowering your average interest rate to save money and time on managing and paying off debts.
   
   
3. Consider a balance transfer card
   Balance transfer credit cards offer 0% APR on balance transfers for a fixed period, saving on the transferred amount’s interest and helping each debt payment go further. Therefore, these could work well if you have a plan to pay off credit card debt in a short period of time.
   
   Keep in mind that balance transfer cards may charge a fee that’s typically between 3% to 5% of the transferred amount, adding to the balance.² Additionally, other APRs, such as penalty or cash advance APRs, may cause you to incur interest.