What Is the Debt Avalanche Payment Strategy?

Minimize interest costs by paying high-interest debts first

A woman concerned about her debt looking at a pile of bills

Clarissa Leahy / Getty Images

Borrowing money can help you accomplish great things, but you need to pay interest when you borrow. Ultimately, those interest charges increase the cost of whatever you buy, and monthly payments can limit your freedom (not to mention your ability to borrow for other purchases).

If you’re serious about eliminating debt and minimizing interest costs, you may want to use the debt avalanche method of debt payoff. 

What Is Debt Avalanche?

The debt avalanche is a strategy of paying 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

With the debt snowball method, 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. 

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

  1. Take inventory: Gather a list of everything you owe. List your debts in order of the interest rate on each loan or credit card, starting with the highest rate and working down to the lowest. 
  2. 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 you need to stay current on the others to avoid fees and damage to your credit score.
  3. Pay extra on the highest rate: With any additional money you have available each month, pay extra on the highest interest rate loan. You’re reducing the amount you owe at that high rate.
  4. Build momentum: Once you pay off a loan, cross it off the list and move on to the loan with the next highest interest rate. The previous loan’s minimum payment (which you no longer need to pay) becomes available for additional debt payments.

Calculate your debt avalanche pay-off schedule and see the example below in Google Sheets.

Debt Avalanche 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 you pay 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 Min. Pmt.
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, your additional $150 goes toward your 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 your $150 extra) monthly.

Build Momentum

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

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

With a debt avalanche, there’s 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.

Why It Works

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.

Who Is a Debt Avalanche Best For?

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

Is This the Best Strategy?

A debt avalanche is an excellent strategy for minimizing costs and getting out of debt. However, it’s wise to scrutinize any strategy before following it blindly.

Debt snowball? 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, and it might take a long time before you pay off a loan.

Humans aren’t always rational when it comes to money, and that’s okay. The best strategy is the one that helps you get out of debt successfully.

Debt snowballs and debt avalanches are both useful, and wiping out debt is the most important outcome. If you can pay less interest with a debt avalanche, that’s great. But if you do better with the psychological benefits that come with a debt snowball, that’s fine too (assuming there’s no massive cost difference). The higher interest cost might just be a price that’s worth paying to help you stay on track.