Debt Avalanche

Debt avalanche summary:

• The debt avalanche is a debt organization strategy where you pay off your debt with the highest interest rate first.

• If you have multiple credit card balances, the debt avalanche could help you decide where to put your extra money.

• You could save money on interest with the debt avalanche compared to paying off all of your debts at the same pace.

Debt Avalanche Definition and Meaning

The debt avalanche is a method for paying off multiple debts. You make minimum payments on all your accounts, and then put your extra money toward the debt with the highest interest rate. Once you pay off that debt, you move on to the debt with the next highest interest rate, and so on, until you’ve paid off all your accounts.

How the Debt Avalanche Works

Before you start a debt avalanche plan, figure out how much money you can afford to put toward your debt each month. Take your monthly income and subtract your expenses. Try to cut back spending where you can, as any extra money you can put toward your debt will speed up the repayment process.

Once you know how much you can free up to pay toward your debt per month, here’s how to create a debt avalanche:

1. Make a list of all your debts and the interest rates. You can typically find the interest rate on your monthly billing statement or in your online account, or you can call the lender to ask.

2. Pay the minimum required amount on all of your debts every month. You may want to set up automatic payments to save time and avoid missed payments. If you do, make sure that your bank account always has enough money for the upcoming payments.

3. Use any additional money that you’re able to set aside for debt repayment to make extra payments on the debt with the highest interest rate.

4. Continue to pay extra on the debt with the highest interest rate until you pay off the balance.

5. Once the first debt is paid off, take the entire amount you were paying each month and add it to the minimum payment you were making on your next most expensive debt. Your monthly payment amount on Debt #2 should be a little bigger than the payment you were making on Debt #1.

6. Follow the same process with whichever debt now has the highest interest rate, and stick with this strategy until you get rid of all your debt.

Key Aspects of the Debt Avalanche

If you have debt spread across multiple credit cards, the debt avalanche can help you organize your payments and potentially save on interest. You can use the debt avalanche with loans or credit card debt. The plan is easy to follow. You just pay extra on one account every month and pay the minimum on the rest to stay current on them.

Because you prioritize debt with the highest interest rate, the debt avalanche can be an efficient way to pay off multiple debts. If you don’t add any new debt, you could pay less interest overall compared to dividing your payment equally between each account. You might also pay off your debts sooner, compared to a debt snowball (a strategy where you pay off the debt with the lowest balance first).

The debt avalanche works if you’re able to make your minimum payments every month and pay extra onto one of your balances. If you’re unable to pay all your accounts, consider another debt relief plan that better suits your needs.

Real-Life Example of the Debt Avalanche

Let’s say you can pay $300 per month total toward your debt. You have credit cards with the following balances, minimum payment amounts, and interest rates:

To follow the debt avalanche, you’d pay $205 total to make the minimum payments on each card. You’d put the remaining $95 on Card D, since that card has the highest interest rate. After you pay off that card, you start putting your extra money toward the balance on Card A, then Card B, and finally Card C.