The Debt Avalanche Method: How It Works and When to Use It

The Debt Avalanche Method: How It Works and When to Use It article image.

The debt avalanche method is a way to pay down debt by getting rid of your balance with the highest interest rate first.

With this payoff strategy, you make minimum monthly payments on all your debts but pay extra toward your debt with the highest interest rate until it's gone. You then apply your minimum payment from the eliminated debt plus more, if you can spare it, to the balance that carries the next-highest rate, and so on.

Compared with other debt paydown strategies, the debt avalanche method has the potential to save you the most money by limiting costly interest charges. Here's how to make it work for you.

How the Debt Avalanche Method Works

The debt avalanche method eliminates your most expensive debts first, earning you returns on your money more quickly. Think of it this way: Say you have a student loan that carries a 6.8% interest rate annually. When you pay it off, your budget earns back the equivalent of that interest since you're no longer making payments on the debt.

Loans and credit cards generally collect interest on top of the principal balance you've borrowed, or on top of the credit card charges you've made, as a fee for borrowing money. Taking on debt can end up being far more expensive than you initially planned, largely because of compound interest. That means that as interest is added to your debt, further charges are calculated based on the new, larger total. Your minimum payment might not be enough to cover all the interest that's accumulated over time.

When you get rid of debts using the debt avalanche method, you stop the growth of compound interest and save the most in interest by attacking those debts with the highest interest first.

How to Pay Off Debt Using the Avalanche Method

Here's an example of what the debt avalanche method could look like. Let's say you have three credit card balances: $8,000 at 15% APR; $3,000 at 18% APR; and $5,000 at 20% APR.

If you make only the minimum payments on each debt—which are typically calculated as 1% to 4% of your outstanding balance—you could pay almost $9,000 in interest, and you wouldn't be debt-free for almost 12 years.

Using the debt avalanche, you'd pay off the $5,000 balance first, even though it's not the largest, because it has the highest interest rate. Once it's gone, you'd then apply its minimum monthly payment to the $3,000 balance with the 18% APR. Once the $3,000 balance is paid off, you'd apply its monthly payment to the final $8,000 balance.

Interest savings will add up. You'll save almost $3,000 in interest alone by paying off your first $5,000 balance in 12 months, rather than the nearly 12 years it would take when paying only the minimum.

Is the Debt Avalanche Better Than the Debt Snowball Method?

A drawback of the debt avalanche method, as you can see from our example, is that your first balance may feel overwhelming to eliminate. Paying off $5,000 to start might seem like a steeper hill to climb than paying off $3,000.

The debt snowball method is an alternative that can give you the opportunity to feel successful faster. This strategy recommends paying off your smallest balance first, no matter the interest rate. You won't see the same interest savings over time, but experiencing a quicker victory early could keep you going, and ensure you make it to the end of your debt payoff journey.

In our example, you'd pay off the $3,000 balance first because it's the smallest, then move on to the $5,000 balance, and finally the $8,000 balance. The $8,000 debt is the last one to tackle in both scenarios because it's the largest, and has the lowest interest rate. But using the debt snowball might give you more encouragement early on—and get you to the finish line.

An even bigger drawback of the debt snowball, though, is that you'll save less money. That makes the debt avalanche method a superior strategy in most cases.

For instance, tackling the $3,000 balance in 12 months rather than the nearly 10 years it would take while making minimum payments would save you about $1,370. That's a significant amount, but it's less than half what you'd save if you used the debt avalanche method at the first stage in the process.

A Strategy That Gives You Control

Perhaps the biggest upside to using a method like the debt avalanche is that it puts you in more control of your finances.

When you make a plan, you'll familiarize yourself with the ideas of minimum payments, interest rates or payoff timelines. You'll do the work to gain an understanding of your debt, which is nearly as useful as making the payments to get rid of it. The debt avalanche method is a framework that can get you back in the driver's seat—and save you money along the way.