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How to Use the Debt Avalanche Method

October 21, 2019

Tip of the Week

List all of your debts from the highest interest rate to lowest, and start paying off the debt that charges the highest interest rate first.

3 min read

You’ve heard of the snowball method for tackling debt. That’s when you take the smallest debt you have and pay it off first, then tackle progressively larger debts. By dealing with your smaller loans first, the theory goes, you’re building confidence about getting out of debt.

But have you heard about the avalanche method? It’s almost the opposite of the debt snowball.

Jargon Hack

What is an interest rate?

Interest Rate

It’s the amount that’s charged on any unpaid amount, or balance every month. The interest rate is also called the annual percentage rate, or APR, which is the amount your monthly interest translates to annually.

Find out

Here’s how it works: With the avalanche method, you list all of your debts such as credit card or auto loans, from the highest interest rate to lowest rate. Then you start paying off the debt that charges the highest interest rate first. After that, you tackle the next-highest interest rate loan, and then gradually work your way up the ladder. The logic behind the avalanche method of paying off debt is that higher interest costs you more money the longer you hold it. So, by paying off the higher interest rate debt, you’ll be saving yourself money in the long run.

By eliminating the higher interest debt first, you’re likely to save money.

Special note: Credit card debt is like a loan, extended to you by a bank or some other financial institution on a revolving basis. That means as you repay the debt, generally speaking, you are free to borrow again from your credit line.

Tactics and considerations:

Jargon Hack

What is a minimum payment?

Minimum Payment

It is the lowest amount of money you are required to pay each month on an outstanding loan balance.

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Debt Avalanche Example:

Let’s say you have $15,000 in debt as follows:

Now, let’s say you’ve determined you have $500 a month in your budget to pay your debts, and your minimum payment for each of your three loans is $30, or $90 total. Next, add up the two loans on which you’ll be paying the minimum (the car loan and student loans, in our example). Subtract that amount from your total:

$500 – 60 = $440

You’ll pay $440 each month on your high-interest credit card debt, which will get you paid off in about a year.

$440 x 12 = $5,280

In addition to paying more on the highest-interest rate credit card, you’ll continue making minimum payments on all the other loans during that time. After that, you apply the same method to your remaining loans. Pay off the car loan first with the majority of your budgeted income for debt, and then the student loan, until all of your debt is paid off.

Whether you use the debt snowball, or the debt avalanche, the important thing to remember is that you should consider having a plan to pay off your debt.

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Make saving and investing a habit.

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Make saving and investing a habit.

Go automatic with Auto-Stash.

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By Stash Team

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