What is the debt avalanche method and how does it work?
Paying off high-interest debt first can help you become debt-free faster. The debt avalanche method is a straightforward way to do this, and it can be an effective repayment strategy to keep more money in your pocket.
Here’s how the debt avalanche method works, including a simple step-by-step guide to follow.
What is the debt avalanche method?
Best for: People who want to save money on interest and don’t mind waiting to see results
The debt avalanche method is a repayment strategy that focuses on paying off your debt with the highest interest rate first, regardless of the balance size. Repaying your highest-interest debt first means you’ll save on interest costs while you continue paying down your other debts.
This aggressive approach can be a good fit if you are more data driven or have significant balances with high annual percentage rates (APRs) that are accruing hefty interest charges. It could also be ideal if you don’t mind it taking longer to see the results of your efforts.
Debt avalanche: Step-by-step guide
If you’re ready to start the debt avalanche, follow these five steps:
Step 1: List out your debts
First, jot down the following details for all of your debts:
- Current balance
- Interest rate or APR
- Monthly payment
Don’t include your primary mortgage (if applicable) in this list as it most likely has a much larger balance and longer repayment period than your other debts. It might have a lower interest rate compared to your other balances, too.
Step 2: Order your debts from highest interest rate to lowest
After you’ve listed all of your debts (minus your mortgage), order them from the balance with the highest interest rate to the lowest. This is the order that you’ll focus on when allocating extra payments.
Here’s an example:
- Credit card A: 27% APR
- Credit card B: 21% APR
- Personal loan: 15% APR
- Auto loan: 8% APR
If you have debts with variable interest rates — like credit cards or home equity lines of credit (HELOCs) — list their current APRs. You can always adjust the repayment order as needed if your rate changes significantly.
Step 3: Keep making minimum payments on everything
Continue making the minimum monthly payment on each of your accounts. This will help you avoid any late fees and establish a positive payment history, which can benefit your credit score.
Treat the sum of all your minimum payments as your base contribution each month. If you pay off a balance, you can continue putting what was the minimum payment for that debt toward your other balances as an extra payment. For example, if all your minimum balances add up to $950, plan on paying at least $950 each month going forward, even after you pay off accounts.
Step 4: Put any extra $$ toward the highest-interest debt
Contribute any extra funds you have after making your minimum payments toward your balance with the highest interest rate first. Paying down this balance early can help you avoid accruing additional interest charges.
Even just an additional $10 or $20 per month can help get you to your payoff date faster.
Step 5: Roll payments into the next-highest interest debt
Paying off your first balance is a huge achievement, and it’ll likely help keep you motivated to continue. Now you’ll roll what you were paying toward your highest-interest debt to your balance with the next-highest rate, plus any extra contributions you can afford.
You’ll continue in this fashion — rolling the previous payments to your next-highest debt — until all of your accounts are paid off. And since you paid off your most expensive debt first, your extra contributions will get bigger as you focus on debts will lower rates — like how an avalanche gains intensity while sliding down a mountain slope.
Debt avalanche example
Here’s an example of what the debt avalanche might look like the pay off the following debts:
| Payment order | Debt | APR | Balance | Minimum payment |
|---|---|---|---|---|
| First | Credit card A | 27% | $8,000 | $200 |
| Second | Credit card B | 21% | $5,000 | $100 |
| Third | Personal loan | 15% | $12,000 | $356 |
| Last | Auto loan | 8% | $20,000 | $405 |
In this scenario, your combined minimum monthly payment would be $1,061. You could be debt-free after about 63 months by rolling the contributions from your paid-off accounts into the next account.
How much you could save in interest
Here’s a quick comparison of how much you can save by simply rolling over your payments and how extra payments help.
| Extra monthly contribution | No roll-ins (No debt avalanche) | $0 (roll-ins only) | $20 | $100 | $200 |
|---|---|---|---|---|---|
| Total interest paid | $27,700 | $21,235 | $19,913 | $15,992 | $13,047 |
| Time in debt | 10 years | 5 years, 3 months | 5 years, 1 month | 4 years, 5 months | 3 years, 11 months |
Simply rolling the payments from your paid-off debts into your remaining loans speeds up the repayment process. This could help you save thousands of dollars in interest — but your personal savings depend on your balances, rates, and extra contributions.
Find out: How to consolidate high-interest debt
Pros and cons of the debt avalanche method
Here are some pros and cons of the debt avalanche method to keep in mind:
Pros and cons
Pros
- Can help you save on interest
- Might be a faster payoff approach overall compared to methods like the debt snowball
- Can be appealing for data- or math-driven people
Cons
- Can take time to see results and requires discipline to stay on track
- Can take a while to build momentum since you aren’t necessarily paying off smaller accounts first
- Might be intimidating to focus on your highest-rate debt first
Debt avalanche calculator
Using a calculator can help you visualize potential savings and figure out how soon you could be debt free. You can plug your current balances, rates, and monthly payments into Undebt.it’s free debt avalanche calculator to get a head start.
Debt avalanche vs. debt snowball
The debt avalanche and debt snowball are both popular payoff plans, but they each have a different approach. Running the numbers and comparing the benefits of both strategies can help you decide which is better for you.
Here are some important factors to help you decide between the debt avalanche vs. debt snowball.
| Debt avalanche | Debt snowball | |
|---|---|---|
| Repayment strategy | Focus on highest rate first | Focus on smallest balance first |
| Motivational factor | Saving as much on interest as possible over time | Small wins from paying off balances, which helps build momentum |
| Speed | Usually faster | Usually slower |
| Best for | People who want to get out of debt fast and who don’t mind it taking some time to see results | People motivated by small wins who don’t mind not saving as much on interest |
The debt avalanche is often the cheaper and faster option, but it depends on your account balances. For example, the results can be similar to the debt snowball if your smallest accounts happen to have the highest rates.
However, the debt snowball is likely the better choice if paying off small debts can help you maintain the habit of making consistent payments. Plus, the mental rewards from paying off accounts can be worth not saving as much on interest if they keep you motivated.
Compare more: Debt snowball vs. debt avalanche: Which payoff method is better?
Debt avalanche FAQs
Whether the debt avalanche or debt snowball is better depends on how you’re motivated. For example, if you want to save on interest and don’t mind it taking a while to pay off your first balance, then the debt avalanche could be the better option.
But if you need the motivation of quick wins from paying off smaller balances more quickly, then the debt snowball might be more ideal.
When applying the debt avalanche method, you should include all debts outside of your primary mortgage (if applicable), such as:
- Auto loans
- Credit cards
- Lines of credit (personal or home equity)
- Personal loans
- Student loans
If you’re following the debt avalanche strategy, and two of your debts have similar rates, it’s best to focus on paying off the smaller balance first. This will get rid of a required monthly payment sooner, and it might also help your credit score.
However, there are a couple of exceptions:
- Variable rate: If one of the accounts has a variable rate that might increase, focus on paying that one off first.
- Difficult creditor: If one account has a challenging creditor to work with, it could be worth concentrating on repaying that one first for peace of mind.
Since most moderate or low-risk investments yield less than 10% per year, sticking to a debt payoff plan still seems ideal. This way, you’ll save more than you’d earn by paying off high-interest debt first — like credit cards and personal loans. However, you should compare your potential investment returns to the current interest rates on your debts first.
If you have a 401(k) with your employer, and they match your contribution, it might be wise to ensure you get 100% of that match before using any extra funds to pay down debt.
