What Is the Debt Avalanche Strategy?

The Debt Avalanche Strategy Explained

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The debt avalanche strategy involves paying off debt starting with the highest interest rate loan. When that is paid off, you apply that payment to the loan with the next highest interest rate.

Learn more about the debt avalanche and how it works.

Definition and Examples of the Debt Avalanche Strategy

With the debt avalanche strategy, you pay off what you owe by prioritizing loans and credit card balances with the highest interest rates. The goal is to minimize the amount of interest you pay, and this approach might help you pay off debt faster than other strategies, like the debt snowball

How the Debt Avalanche Works

Here’s how to save on interest with the debt avalanche method:

  • Take inventory: Gather a list of everything you owe. List the debts in order of the interest rate on each loan or credit card, starting with the highest rate and working down to the lowest. 
  • Pay your minimums: Keep making minimum payments on all of your loans or credit card balances. You’ll focus on one balance at a time, but it’s important to stay current on the others to avoid fees and damage to your credit score.
  • Pay extra on the highest rate: With any additional money you have available each month, pay extra on the highest interest rate loan. This reduces the amount you owe at that high rate.
  • Build momentum: After paying off a loan, cross it off the list and redirect the amount you were paying on that loan to the loan with the next highest interest rate.

Calculate your debt avalanche pay-off schedule using a spreadsheet. If you want to create your own schedule, you can use our loan calculator to quickly determine how much interest you'll pay until a card or account is paid off.

Consider this example. Assume you owe money on the loans detailed below. Based on your monthly budget, you know that you have an extra $150 available each month for debt elimination. Which loan should be paid off first?

List each of your loans in order of the interest rate, with the highest rate at the top.

Debts to Pay Off
Type Balance Rate Minimum Payment
Credit card $16,000 17% $480.00
Personal loan $2,000 7% $39.60
Private student loan $13,000 5% $183.74
Auto loan $21,559 4.75% $404.38
Medical office $1,300 0% $100

With the debt avalanche method, the additional $150 goes toward the credit card payment because that loan has the highest interest rate. As a result, you pay $630 to your credit card issuer (the $480 minimum payment plus the $150 extra) monthly.

After paying off the credit card, that minimum payment goes away, so you have even more cash flow available on a monthly basis. The $630 you were paying to your credit card company can now go toward the personal loan. As a result, you pay $669.60 ($630 plus your required $39.60), which quickly eliminates the remaining loan balance. 

Next, fold what you were paying on the personal loan into your additional payments, resulting in an additional $669.60 per month on your student loan. The total amount you then send to the loan servicer is $853.34 ($669.60 plus the required $183.74). Continue the process until you are debt-free.

Benefits of the Debt Avalanche Strategy

The debt avalanche is an effective strategy because it focuses on interest rates. On most loans, a portion of each monthly payment goes toward interest charges, and the remainder reduces your loan balance. With high rates, you need to pay more to cover interest costs, and your payment might only make a small dent in your loan balance. By minimizing your overall interest rate, you waste less money on interest.

Do I Need to Use the Debt Avalanche Strategy?

The debt avalanche might be a good fit if you:

  • Want to minimize your total cost of borrowing 
  • Believe in the logic behind the strategy (paying as little interest as possible)
  • Have the discipline to keep paying extra on a sizeable debt for an extended period without the satisfaction of seeing it paid off quickly
  • Don’t need positive reinforcement frequently (or early in the process)
  • Are motivated by facts and figures

Debt Avalanche Strategy vs. Debt Snowball

Debt Avalanche Debt Snowball
Pay off debt starting with the highest interest rate Pay off debt starting with the lowest balance
Offers lower costs in the long term May cost more in interest, but offers small "wins" as you pay off balances

A debt avalanche is an excellent strategy for minimizing costs and getting out of debt, but it might not be right for everyone.

Another option is the debt snowball method. With the debt snowball, you pay off your debts in order of size, from smallest to largest. The idea is that having small wins early on helps motivate you to stick with your debt reduction plan, but this method could end up costing you more in total interest. 

For some, a debt snowball strategy might be a better option. That’s particularly true if you’re likely to lose motivation during your debt elimination journey. The debt snowball method provides small victories early in the process, which can help you stay disciplined and keep hope alive. With a debt avalanche, you need to trust that it’s best to pay down loans with high rates first, and it might take a long time before you pay off a loan.

Using the earlier example, with a debt avalanche, there would be no rush to pay off the interest-free medical debt because it doesn’t cost any interest. But the debt snowball would instruct you to pay off that loan first because it has the smallest loan balance.

What to Do If You Need Help

While the debt avalanche method can be a beneficial solution for some, others may need additional guidance. Consider the following options.

Credit Counseling

If you’re struggling with your payments, and you don’t have extra money to put toward a debt avalanche, consider asking for help. Nonprofit credit counseling agencies can provide guidance and education to help you take control of your debt. They might even set up a debt management plan (CMP), which can offer relief in the form of lower monthly payments and lower rates. 

Credit counseling agencies typically charge a modest monthly fee for helping you manage your debt. 

Debt Settlement

Debt settlement is another option, although it’s a more extreme solution. With debt settlement, you attempt to pay creditors less than you owe them with help from a for-profit company. There’s no guarantee that your lender will be willing to negotiate, and debt settlement programs can lead to lower credit scores. As a result, it’s ideal to try other solutions before you try debt settlement.

Key Takeaways

  • With the debt avalanche strategy, you pay off what you owe by prioritizing loans and credit card balances with the highest interest rates. 
  • The debt avalanche is best for those who want to minimize interest. 
  • The debt snowball strategy pays off debt starting with the smallest balance, which offers small wins along the way. With this method, you may pay more in interest. 
  • If you can’t afford your minimum payments, speak with a nonprofit credit counseling agency, and consider debt settlement as a last resort.