Our goal here at Credible is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders, all opinions are our own.
One of the best ways to tackle your debt is the debt avalanche method — which helps you minimize the amount of interest you pay. Learn how using this technique can help you become debt-free.
What is the debt avalanche method?
The debt avalanche method is when you tackle your debt with the highest interest rate first.
You’ll continue to make minimum payments on all your other debt, but put as much extra cash as you can to the highest interest debt. Once you’ve finished paying off the debt with the highest interest, you roll the money you were putting toward that into the next highest interest debt — and so on.
This method is different from the debt snowball method, which concentrates on paying off the smallest debt first. The avalanche method is a good idea for those tackling credit card debt and high-interest loans. The sooner you pay off high-interest debt, the less you’ll pay in interest which will save you money overtime.
How to get started with the debt avalanche method:
- List out all your outstanding debts
- Pay extra on your debt with the highest interest rate
- Move to the next-highest interest rate
- Keep paying the minimum on everything else
- Repeat until all debt is paid
1. List out all your outstanding debts
Start by simply listing out all of your outstanding debt. Whether it’s your mortgage, auto loan, credit cards, student loans, or medical debt, be sure to include everything.
For each debt, be sure to include:
- Type of debt
- Interest rate
- Total amount due
- Minimum monthly payment
Then sort these by the highest interest rate, so you know which debt to tackle first.
Here’s an example worksheet you can follow to get you started:
2. Pay extra on your debt with the highest interest rate
With all your individual debts accounted for, it’s time to tackle the debt with the highest interest. Put all your extra cash toward that high-interest debt.
To free up the extra funds to do this, consider cutting back on some expenses like dining out, entertainment, or other categories that aren’t really needed. Every little bit counts, whether it’s $10 extra a month you’re saving from unsubscribing from Netflix or $100 you save by cooking at home more instead of ordering from GrubHub.
3. Move to the next-highest interest rate
After your highest-interest debt is completely paid off, it’s time to move onto the next debt with the highest interest. You’ll be able to use all the money you were using for the debt you just paid off, plus the minimum payments you were already making.
For example: If you’re paying $200 per month toward the debt you just paid off, and the next debt you’re focusing on has a minimum payment of $100, you should be putting at least $300 toward this debt every month ($200 + $100 = $300).
And if you can afford to pay a little bit more, you should — this will help you become debt-free even sooner.
4. Keep paying the minimum on everything else
If needed, adjust your budget to include making minimum payments on each debt you have. It’s important not to fall behind on any of your payments or your credit score could take a hit. The only payment that will be higher than the minimum is the one with the highest interest that you’re focusing on paying down first.
Learn: How to Improve Your Credit Score
5. Repeat until all debt is paid
Once each debt is paid off, you’ll move all the money you were paying on it to the next highest interest debt. You’ll start to have more money after each debt is paid off to move onto the next one. You’ll continue this process until all of your outstanding debt is paid in full.
Which method is right for you?
While the debt snowball method wants to give you a quick win by concentrating on the smallest debt first, the debt avalanche method is a little different.
Use the debt avalanche method if…
- You have high-interest debt
- You want to save the most money on interest
The debt avalanche method is meant to eliminate more out-of-pocket costs you pay through interest. You could end up taking longer to pay it off, but by focusing on the highest-interest debt as much as possible, you’ll lower your overall interest payments.
Use the debt snowball method if…
- You’re motivated by small wins
- You want to see immediate success
Your smallest debt might not be the one with the highest interest. That means while you might pay off the smallest balance sooner, you could still pay more in interest over time. But if you’re the type who’s motivated by seeing progress sooner, the debt snowball method might work for you.
Alternative ways to pay down debt
The debt avalanche method isn’t the only type of debt repayment plan. Here are a few other options if you need help paying down your debt:
- Balance transfer: If you have high-interest credit card debt, a 0% APR balance transfer credit card might be a solid alternative. But keep in mind that your full credit card balance might not get transferred over, which means you’re on the hook for payments to your new card as well as the one with high interest.
- Debt consolidation: You can also try a debt consolidation loan. You’ll take out a lump sum loan, pay off all your outstanding debt, and then make one payment on your new loan. This is a good idea if you struggle to meet all your payments on time every month. The best personal loan lenders have flexible repayment plans, minimal fees, and offer the lowest interest rates.
- Debt relief: There are other debt relief programs you might qualify for if the debt avalanche method and alternatives don’t work for you.
