Debt Avalanche Method: A Strategy to Pay Off High-Interest Debt

The debt avalanche method is a repayment technique that could help you manage significant financial obligations. The premise is pretty straightforward:

Instead of paying off debt according to balances, you focus on the debt with the highest interest rate. By doing this, you will save yourself money in interest. 

If you’ve accumulated debt and are determining which debt repayment strategy you want to use, here’s what you need to know about the debt avalanche method.

What is the debt avalanche method?

The debt avalanche method is a high-interest debt payoff technique. It can be used for paying off credit card debt, or any debts that carry interest.

To use this method, look at your revolving credit (such as credit cards) and installment consumer loans (personal loans, student loans, or auto loans). Determine which has the highest interest rate, and pay that one off first. Once it’s paid off, you can focus on the next highest interest rate. You’ll save money because you’re paying off the loan that is costing you the most money over time.

The debt avalanche method is one of many debt management techniques that personal finance experts recommend. The debt snowball method involves paying off the smallest balance first and then going after the next smallest. Other methods take into account saving for retirement. The debt avalanche method, on the other hand, focuses solely on interest to save you money.

How does the debt avalanche method work?

The debt avalanche method is a three-step process that you repeat until your debt is paid off. Here’s how it works. 

1. Identifying high-interest debts

Look at all your debts and determine which one has the highest interest. This could include:

• Credit cards
• Personal loans
• Student loans
• Auto loans

2. Prioritizing payments

Come up with a game plan that prioritizes the debt with the highest interest rate. Then, rank your remaining debts from highest to lowest. Your hierarchy will determine the order you pay off accounts in the coming months.

3. Making minimum payments on other debts

While you’re putting additional money toward your highest-interest debt, only make the minimum payment on each of your other debts. Don’t fall behind or miss payments, as this would hurt your credit score, but instead, do the bare minimum to keep each of your other accounts current and in good standing. Any additional cash you have each month should be put toward the debt with the highest interest until it’s paid off.

Benefits of the debt avalanche method

“The debt avalanche method makes sense financially,” says Melanie Musson from Clearsurance. “You minimize the amount of money you waste on interest when you pay off the highest interest debt first.”

Aaron Razon, a personal finance expert and writer for Coupon Snake, adds: “The most outstanding benefit of the debt avalanche method is not just the fact that it helps you save on interest payments, but that it also helps you realize how much money you are losing on interest payments over time, and in my experience, I have found that this realization plays a crucial role in an individual's financial decisions. The truth is that just very few people understand how much financial progress their debt load is costing them.”

Interest savings over time

How much you’ll save in interest depends on how much you can put toward each payment each month. The more money you put toward your monthly payments, the better. You can use an online debt calculator to see how much you can save and how long it will take to pay off based on different monthly payments.

Faster debt repayment

By focusing all of your additional resources on your highest-interest debt first, not only will you save more money in interest, but you also might get out of debt faster. 

Because each person’s budget is unique, enter your balances, minimum payments, and interest rate information into a debt payoff calculator. Determine your total budget for monthly debt payments. The calculator will tell you how long it will take you to get out of debt, and it will tell you how much you’ll save over time by using the debt avalanche method.

Improved financial health

You’ll see a few benefits from paying off your debts. The first is you’ll have more cash each month as various debts are paid off. As you lower your overall debt, your credit score will improve, and you’ll be able to put more money into savings. Whether you’re building a rainy day fund, planning an upcoming vacation, or saving for your retirement, you'll have more money to put toward your goals. 

A higher credit score will be useful if you need to take out a large loan in the future, such as to buy a house. 

Debt avalanche vs. debt snowball: Which is right for you?

You may have also heard of the debt snowball method — both the snowball and avalanche techniques help you pay off debt faster. The debt snowball method takes a different approach to paying off debt that you may want to consider. 

Key differences between the methods

The avalanche method focuses on paying off the debts with the highest interest first. Once it’s paid off, you shift your extra monthly payments to the debt with the next highest interest rate.

The snowball method, on the other hand, focuses on paying off the debt with the lowest balance. Once it’s paid off, take the monthly payment that would have gone toward it and pay off the next lowest balance. 

Pros and cons of each approach

“The debt snowball method gives you quick wins, which can help keep you motivated,” says Joseph Camberato, CEO and founder of National Business Capital. “Paying off small balances one by one feels rewarding and gives you momentum. But the downside is that it's usually the more expensive route. Focusing on small debts first means your high-interest debt keeps racking up charges, which could cost you way more in the long run. If one of those smaller debts has a high interest rate, it can quickly spiral into a bigger problem."

The opposite is true for the debt avalanche method. While you’re saving money, it can take time to gain momentum, especially if your highest-interest debt also has one of your higher balances.

Choosing the best strategy for your situation

You can use either of these methods or a combination of both, depending on your financial goals. You may have one or two smaller debts that would be quick and easy wins and provide additional money you could put toward your highest-interest debts once they’re paid off. 

You can still be flexible, but the most important step is to develop a strategy. Use a debt calculator or speak with a financial adviser if you feel overwhelmed. The Consumer Financial Protection Bureau has information about what to look for in credit counseling, as well as reputable online sources to help you search for a counseling service.

You may also want to consider a debt consolidation loan or a mortgage refinance.

Tips for successfully implementing the debt avalanche method

If you’re following the debt avalanche method, you need to create a plan and rank your debts from the highest interest rate to the lowest. Once you’ve done that, follow these steps: 

1. Create a realistic budget

Set aside money for unexpected expenses. You may have to pick up dinner one night, or you may have to spend a little more on groceries. Expect hiccups. Give yourself enough wiggle room in each of your spending categories so that the additional cash you put toward your debt is manageable for the long term. 

2. Stay disciplined with payments

It may be easier during some months to throw all of your additional cash at your debts, while it may be a struggle during other months. Stick to the plan as closely as you can, but know that there may be rough patches along the way. The key is to remain consistent. If you set a realistic budget at the outset, that will help you maintain consistency and reach your goals.

3. Monitor progress regularly

It’s important to keep track of your progress to help keep yourself motivated and to help ensure you're doing what’s best for your financial situation. You may want to play around with some debt payoff calculators as each debt is paid off to see if the numbers still add up. Remember, there can be flexibility.