Going Debt-Free: Debt Avalanche Method

Getting into debt is easy. Getting out takes work. Start by being honest about your personal finances and writing down concrete steps to get out of debt. One strategy you can use is the debt avalanche method. 

Compared to other methods of eliminating debt, like the snowball method, the avalanche is most cost-effective and fastest. But it might not feel fast at first. The avalanche works by paying the minimum on all your loans and using any extra money to tackle your high-interest debts first. Because interest charges are a large part of debt repayment, the debt avalanche can save you a lot in the long run. 

In this article, we’ll discuss the debt avalanche method, the snowball method, and other debt relief options so that you can decide which one is best for you.  

Debt Avalanche Method

The debt avalanche method is an accelerated debt repayment plan that prioritizes paying off your highest interest debts first. Credit card balances, for example, have notoriously high interest rates. Left unpaid, the amount you’ll owe in interest alone can get expensive. But the avalanche strategy applies to more than just credit cards. You can use it for other types of consumer debt, including:

• Personal loans

• Car loans 

• Student loans

• Medical bills

But don’t use the avalanche strategy with mortgage payments. If you're struggling with your finances and aren't able to make your mortgage payments, there are other options available to help you. Also, mortgages usually have lower interest rates than consumer debt (including credit card debt), which is another reason not to use the avalanche method on your mortgage. Reserve the avalanche debt payment plan for higher-interest debts.

How Does The Debt Avalanche Work?

The debt avalanche requires making minimum payments on all your interest-bearing loans. But it prioritizes the loan with the highest interest rate first. That way, you secure and (hopefully) reduce the minimum payment owed at that high rate. For instance, in addition to simple interest, credit card companies sometimes also charge compound interest. This is another fee based on the larger total of your debt plus interest. Simple interest is based on an annual rate. But compound interest is charged daily, so it can outpace the amount you originally owed. That’s why the avalanche targets these debts first.

Review Your Budget & Make A List 

You’ll notice we’re assuming that you already have a budget. Many people don’t. But budgeting can be as easy as taking stock of how much you make and how much you spend. In other words, money in, money out.

Making A Budget

Your budget should account for every single purchase you make, from your morning drive-thru coffee to your microwave dinner. Once you have created a budget, you can start to see where you can cut some costs. This might bring up tough questions like: Do I need manicures and movies or should I put that money toward my auto loan? Sticking to a budget will free up money, however small, to put toward debt. Any amount counts.

Avalanche List

Once you’ve made a budget, take stock of your debts. List the annual percentage rate (APR) or interest rate on each loan or credit card. Then order the list from the highest interest rate to the lowest. For example:

• $10,000 credit card balance at 19.99% APR

• $9,000 credit card balance at 16.24% APR

• $20,000 student loan at 4.5% interest

• $8,000 car loan at 3% interest rate

Now you have a plan of attack. Your first order of business is paying more on the credit card that has almost 20% APR. Let’s say you’ve budgeted by eliminating manicures and movies. You’ve made minimum monthly payments on the above debts and have $150 left. If you’re using the avalanche method, you’d put that extra money toward your highest-interest credit card. 

Pay The Minimums 

In any repayment strategy, you’ll want to keep making minimum monthly payments on all your debts until you’ve paid the total amount due. For credit cards, the minimum could be 1%-4% of your outstanding balance. Making minimum payments is important for several reasons, including:

• Avoiding late fees

• Keeping down interest rates

• Tracking your debt reduction

• Ensuring you’re current on all bills

• Protecting your credit score

The avalanche method won’t work if you throw everything toward one debt, lose motivation, and miss one or two payments on other debts. Late or missed payments can show up on your credit report and damage your credit score.

Pay Extra On Highest Rate Loans

If you’re an “avalancher,” you know that any additional money each month should go to the highest rate loan. The more you put toward it, the faster you’ll pay it off. Now that you’re smart to compound interest, you understand the importance of attacking the highest rates first.

The debt avalanche is especially helpful in cases of multiple credit card balances carrying high APRs. For example, take the following credit card debts: 

• $9,000 balance at 15% APR

• $3,000 balance at 18% APR

• $5,000 balance at 20% APR

Using the avalanche method, you’ll attack the $5,000 balance first. Even though its balance is not the lowest, it does have the highest APR. Just by prioritizing the balance with the highest APR, you can save $3,000 in interest payments alone and could be debt-free in one year. If you just made minimum monthly payments on the three accounts, it could take you 12 years to get the same result.

Pay Off Loan & Cross It Off The List

Once you’ve eliminated the highest interest rate loan, you should pat yourself on the back. You’ve successfully shed what was likely your most expensive debt. Cross it off your list of loans and celebrate. Just by shifting that small chunk of snow, you’ve caused an avalanche. Without the highest interest payment weighing you down, you’ll see returns on your money more quickly. You can then apply those savings to the debt with the next-highest interest rate. Rinse and repeat until you reach the lowest interest rate loan.  

Pros & Cons Of Debt Avalanche

The debt avalanche is not for everyone. For instance, personal finance author Dave Ramsey is not a fan. He prefers the debt snowball strategy and you may, too. Like snowflakes, people are different. Though it minimizes interest payments and decreases the time necessary to pay off debts, the debt avalanche has its downsides. It requires extra money to put toward one debt and takes longer to see results. But if you prefer facing the greatest challenge first, the debt avalanche may work.

Advantages Of Debt Avalanche Methods

The debt avalanche method works best if you:

• Have very high-interest debt

• Prefer saving on interest to save you more money in the long term

• Are patient in taking longer to pay off debt

• Get motivated by facts and figures

Just remember that the ultimate advantage is how much you’re saving in out-of-pocket expenses by lowering your total interest over time. As you pay off debts, you'll free up even more money to pay the principal plus interest and any compound interest on other debts. That’s a lot. And it should keep you motivated to chip away at your high-interest debts.

Disadvantages Of Debt Avalanche Methods

The debt avalanche may be less effective if you have:

• Unforeseen expenses like medical bills

• Can’t keep your living expenses to a minimum

• Haven’t set aside money for an emergency fund 

Any extra cost will likely take away the money needed to carry out the avalanche method. Because you’re setting aside money to pay a large debt, not just the minimum balance, the debt avalanche also requires: 

• Discipline and commitment

• Delayed gratification in making a dent in your debt repayment

• A consistent source of leftover income

In other words, if you need quick wins or small victories to stay inspired, the snowball method may work better for you.

Debt Snowball Method As An Alternative 

If you use the debt snowball method, you’ll tackle your debts with the lowest balance first, regardless of their interest rate. Humans crave positive reinforcement, making the snowball strategy more appealing if you:

• Need to see success early on

• Are motivated by tackling small debts first

• Gain momentum with each small victory

• Are inspired to keep on track based on this progress

Let’s compare the snowball and avalanche methods in an example. If you listed your debt by balance rather than the interest rate, it may look something like this:

• $1,500 medical expenses at 0% interest

• $3,000 personal loan at 8% interest

• $15,000 student loan at 6% interest

• $22,000 car loan at 5% interest

• $16,000 credit card balance at 17% APR

Using the snowball plan, you would go after the medical bill first because it’s clearly the smallest balance. You could knock that out much sooner than leaving it for the end using the avalanche plan. The avalanche would focus on the credit card debt first because it has the highest interest rate. Under this method, there’s no hurry to pay the interest-free medical debt.

If you don’t mind paying more in interest over time, the snowball method may be best, if only for boosting morale. If you have no money to pay off credit card debt, you can also seek legal advice to discuss other available options. 

Differences In Priorities 

The main difference between these two methods is how debts are prioritized. Both require borrowers to make minimum payments on outstanding debts. But the snowball strategy starts with the smallest balance first. Once that’s paid in full, you’ll move on to the next smallest balance. The debt avalanche tackles debts with the highest interest rates first. You’ll then go after the next-highest rate loan. 

If your priority is avoiding crippling interest - like compounding interest - the debt avalanche is a great option. If your priority is staying motivated by closing out the smallest balances first, you may prefer the snowball strategy. When you snowball debt repayment, you may pay more in interest, but small wins from knocking out debts may be enough to keep you on track.

Overall Costs

The debt avalanche keeps the total cost of borrowing down because it focuses on higher interest rates. With credit cards, almost half of your monthly payments may go toward interest. Eliminating the highest interest debts first leads to greater savings over time. For strictly financial reasons, it’s preferable. 

But, people require more than numbers to stick with a plan. It’s easier to win people over with behavior modification than by pointing to strict math. It may feel good to knock out a really low balance. This frees you to concentrate on the next lowest balance and minimize your debt exposure. Small, early wins can keep you pumped. Once you’ve successfully erased a small debt, you have more momentum to go after a large one. The victories snowball.  

Other Debt Relief Options

You can also combine the avalanche and snowball methods. For example, you could select a small debt (snowball) that has a high interest rate (avalanche) and eliminate that one first. But if neither option seems appealing, don’t worry. You have other options. If you aren’t sure where to start, reach out to a nonprofit credit counselor to help guide you. You can also consider the following relief plans:

• A Balance transfer: putting debts on one credit card with 0% APR

• Debt consolidation: combining your debts into one personal loan with a low interest rate

• A debt management plan with lower monthly payments and interest

Filing Chapter 7 or Chapter 13 bankruptcy may feel like a last resort but could provide much-needed debt relief if you have too many debts to handle using one method. Another option is debt settlement, which allows you (or a company you pay) to negotiate with your lender to pay back less money than you owe. But, this may be a slightly riskier measure that requires you to research the company you hire to help you.

There are many companies in the debt settlement industry that try to scam consumers. The Federal Trade Commission (FTC) is continually warning consumers of scams in this industry. If you decide to hire a company to help you settle your debt, make sure it is registered with the Nationwide Multistate Licensing System (NMLS) and offers a financial warranty. 

Let’s Summarize...

The debt avalanche method is an efficient repayment strategy that attacks debts with the highest interest rates first. Begin by making a list of everything you owe and order the loans from the highest to the lowest interest rate. Budget so that you can make the minimum payment on all your debts and still have some money left over to put toward the one with the highest rate. Once you pay this in full, move on to the debt with the second-highest rate.

The avalanche strategy will save you a lot in interest charges over time. But it’s not for everyone. The plan requires dedication, commitment, and patience. It’s easily derailed by a surprise expense and often takes a while to see progress. If you need small wins early on, you may prefer the snowball method. This prioritizes bills with the lowest balance and knocks them out first. The positive reinforcement from erasing one bill can motivate you to keep going until you’ve paid off your largest balance. Sometimes, feelings are more important than math.

If neither of these methods appeals to you, you can always consult a legal professional or credit counselor to discuss other debt relief options.