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How To Use The Debt Avalanche Method To Get Out Of Debt

The debt avalanche method is one of the most popular methods to get out of debt. How does it work and what are the pros and cons of the process?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

When discussing retiring a debt, your strategy can spell the difference between success and failure. If you don’t have one, chances are, you’ll head to failure. But those who have created a debt repayment plan know exactly how much extra cash they can pay towards their debts and what debt is on the top of their list. Your plan will motivate you and optimize your chance of becoming debt-free as quickly as possible.

You’ve heard about the debt snowball method. There’s another method to pay down your debt you might not have heard about. It is the debt avalanche method, and it can wipe off your debt once and for all.

What’s the Debt Avalanche Method?

The debt avalanche method's principle looks at the debt interests' burden on the borrower and prioritizes their payment.

For example, you pay off the credit card from the highest interest rate to the lowest rate, regardless of the balances. Doing this allows you to lower the amount of each payment that goes to interest faster than a debt snowball scheme.

Interest that keeps on building up makes it hard for you to get out of debt. Zeroing in on this debt can help you address this issue and register some visible progress. With the debt avalanche method, you can save money on interest, and pretty soon, you'll be wiping off your credit card balance in no time.

Example

Let’s look at a simple illustration. Let’s assume that you have 4 existing debts with the amounts $500, $400, $200 and $100. When you use the snowball method, your strategy would be to pay off the smallest debt first. But in the debt avalanche method, you pay off the debt with the highest interest rate burden first. Therefore, the order of payment would be something like:

  • 1: $500 (25% interest rate, $25 minimum payment)
  • 2: $200 (20% interest rate, $10 minimum payment)
  • 3: $100 (15% interest rate, $5 minimum payment)
  • 4: $400 (10% interest rate, $20 minimum payment)

Let’s say that you have set a budget of $170 for debt payment every month. In month one, you would be able to meet the minimum payments to debts #2 to #4 (a total of $35). Your remaining $135 would all go to debt number 1, taking care of the minimum $25 and an additional $110.

Continuing this pattern, you would retire debt #1 in month 4. You can then continue paying the minimum payments to debts #3 & #4 but you will use the money you’ve freed up to pay debt #2 (minimum plus whatever is left on the budget). You would continue with this process until eventually, all your debt payment budget will go solely for the full repayment of debt #4.

$500 / 25%
$200 / %20
$100 / %15
$400 / %10
Month 1
$135
$10
$5
$20
Month 2
$135
$10
$5
$20
Month 3
$135
$10
$5
$20
Month 4
$95 (paid off)
$80
$50
$20
Month 5
$90 (paid off)
$35 (paid off)
$45

How to Use The Debt Avalanche Method

A debt avalanche works this way: You try to get a quick win upfront by retiring the one with the highest interest rate. The debt snowball method will try to retire the one with the smallest balance first and does not mind the interest rates at all.

1.  List Your Debt: Create a list of all your debts and arrange them in a repayment order from the highest interest rate to the lowest interest rate. Disregard the balance of each one for this list.

2. Prioritize Higher Interest: Keep paying at least the minimum payments on all your debts but prioritize paying off the one with the highest interest rate first. Then, you move on to the next one on the list, and so on until you have repaid everything. The only thing that will vary over your repayment time is how much you will pay toward the debt that’s first on your list.

3. Tackle One After Another:  As soon as you’ve crossed out the first debt on your list, add that debt’s minimum monthly payment to the minimum monthly payment of the next debt on your list. This will cause you to pay more every month on this debt and eventually, you’ll be able to pay it off too. Continue the method until you’ve paid off all your debts, like in our example where you can pay 3 debts over time.

4. Keep Payments Until Your Debt Is Over! : Do this month after month. After some time, you’ll be able to pay off the first debt on the list. Once done, move towards putting extra money (plus the first debt’s minimum payment) towards the second debt on your priority list.

When it comes to debt repayment, the debt avalanche method is the most cost-effective and causes you to pay less interest and have a faster repayment timeline.

The other option is the debt snowball method where you pay the one with the smallest balance first even when it has the lowest interest rate. This method is a good motivator because it feels good to pay off one of your debts totally. But the disadvantage is that you may end up paying more interest over the years.

The Debt Avalanche: Pros & Cons

Financially, the debt avalanche is the most effective method. However, there are still some drawbacks to consider: 

ProsCons
You’re going to pay off your debt a whole lot faster because you’re paying less in interest the entire way through.You may have a bit of trouble with motivation because you’re not going to see debts  disappearing as quickly as you would with the snowball method.
You won’t spend as much money on interest.You’re going to have to dedicate yourself and really get into the internal motivation because you won’t see a change to your debt for a while.

This is most helpful in saving you tons of money when you have big debts with high interest. You can save more with this method compared to the snowball method.

Depending on your personal financial situation (your debts, balances, interest rates and debt repayment budget), the debt avalanche method can take a long time. It may take years to pay off even a single debt – imagine all the work you need to do!

If you don’t see yourself being able to chip off a portion of the same exact debt little by little every month, then this method is not for you. A spreadsheet might be helpful to track your progress or maybe a debt payoff calculator can help you zero in on a workable strategy.

This method works best for people who have a high motivation to get out of debt and who can face multiple setbacks. This is also more appropriate for those who incurred their debts due to unusual circumstances.

Debt Avalanche Vs Debt Snowball: How They Compare?

The debt avalanche method sees you looking to save money over the lifetime of your debts by prioritizing paying off those loans that have the highest interest rates.

However, the debt snowball method sees you paying off the smallest debts that you have first of all. The idea behind this approach is to generate some momentum that will lead to a snowball effect kicking in. It will likely increase your motivation as you eliminate your smaller debts completely.

Both methods are effective, and there isn't a significant difference in achieving your goal. You might have a better chance of success with those early quick wins. You can also change methods in the middle of the process — there are no hard and fast rules.

The most important thing is to devise a strategy that will keep you motivated. And, depending on your financial situation, you may be surprised at how quickly you can pay off five-figure debt.

How to Use The Debt Avalanche Method
The debt avalanche method's prioritize the higher interest, (Photo by shisu_ka/Shutterstock)

Debt Avalanche Vs Debt Snowflake: How They Compare?

On the other hand, the snowflake method looks for small, day-to-day savings and uses them to accelerate your debt-free day. It can be used with either the snowball or the avalanche strategies. Tiny savings amassed over time, like snowflakes, can significantly impact. And it would be best if you acted quickly to capture them: snowflakes vanish quickly.

The snowflake method is flexible because there is no need for a structured payment schedule. You are also more likely to consider even minor purchases before making them.

On the other hand, a $100 or so extra paid toward your debt each month will help, but it will not quickly pay off a $20,000 student loan. Furthermore, the absence of a well-organized payment plan may harm your debt management in the long run.

Many financial experts believe that the snowflake method is an excellent complement to the snowball or avalanche strategy. However, as a stand-alone strategy, it is not generally regarded as the best way to pay off a student loan or credit card debt.

More Tips To Avoid Debt

Here are some options that can help you to avoid accumulating more debt:

he best thing you can do for yourself is to keep your credit card balance at zero each month. That does not imply that you do not use the card.

It simply means that you pay it off at the end of the month so that the next month begins with nothing. What's great about this is that you can borrow money for things you want and need without paying interest.

You never want to max out your credit card for any reason. For one thing, if the balance is too high, it will be extremely difficult to pay off.

Another disadvantage is that you won't have a buffer in case of an emergency and need to charge something. Another issue is that you will have a high credit utilization rate, which will harm your credit score.

You want to keep that debt at a minimum so that your credit score looks better to those who are checking.

When it comes to emotional purchases, there may be no need at all. Instead, it could be an outside force that influences us and persuades us to make the purchase.

This means that you made this purchase on the spur of the moment and based on the recommendations of others. You may not require the item at all or require it as urgently as you believe.

A debit card is similar to a credit card in one crucial way: you can swipe it on a machine. It's also convenient because you don't have to carry cash with you.

However, because it is linked to your bank account, you cannot get into trouble with it. You cannot make a purchase if there is no money in your account. That means you won't be able to incur debt with this card.

Bottom Line

The debt avalanche method works best when your debt with the biggest balance is the one with the highest interest rate. If the one with the highest interest rates is the smallest loan, this method doesn’t make much of an impact.

Eventually, it is up to you to make a choice. On one end, there’s the debt snowball method which has proven itself to be effective in helping people stay on track on their debt repayment challenge. On the other end, there’s the debt avalanche method that has a mathematical backing to show that it’s cheaper for you. The decision is up to you.

Math will tell you that the debt avalanche method is the way to go. But it doesn’t necessarily mean that it’s the best method to retire your debts. If you ultimately decide that the debt avalanche method is for you, find ways to stay motivated and on course. You can set small goals for yourself and celebrate their achievements (without spending money) to mark your milestones.

FAQs

Debt consolidation is a type of debt relief, but it is usually something you can do on your own without the help of a debt consolidation company. Furthermore, your ability to obtain a debt consolidation loan will be determined by your current credit score.

If you already have a low credit score, you may have difficulty obtaining a loan. Debt relief , on the other hand, such as debt settlement, are not affected by your credit score.

Consolidating your debt allows you to combine all of your debts into a single payment. You will consolidate all of your debts into a single monthly payment. In many cases, this makes things much easier to manage.

When you consolidate your debt, you may also end up paying a lower overall interest rate on the debt. You can consolidate debt in a variety of ways, including obtaining a personal loan, tapping into your home equity, or obtaining a credit card with a 0% APR.

In mathematical terms, the avalanche method is the best way to pay off debt. This involves you marking your debts in order of highest interest rate to lowest interest rate. You will pay the minimum balance on each of these debts and then look to use any extra funds to pay off the debt with the highest interest rate.

The snowball method is another popular method for debt repayment. It observes you prioritizing your smallest debts. The idea is that as you eliminate various types of debt, you will gain momentum and be motivated to continue this process.

Debt management programs allow you to create a payment schedule that consolidates your various credit card debt payments into a single monthly payment. There will be no loan as part of this process, and credit scores will not be affected.

When you enroll in a debt management program, you will usually be required to close all of your credit cards in order to avoid further debt accumulation.

While it is possible to give your consent for organizations to check your credit report, these usually relate to credit applications. You may be able to access assistance for checking your credit report, but it may be simpler to request a copy and check the details for yourself. You are more likely to be able to spot any errors, since you will be more familiar with your personal and financial details.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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