Feeling Crushed by Debt? The Avalanche Method Could Help You Break Free

The formation of an avalanche is called the Starting Point. 

They begin slowly and can quickly spiral out of control, making it difficult to escape – just like your personal debt.

The hardest part of getting out of debt is finding your starting point. Debt avalanche could be the debt repayment method to keep you from becoming buried by credit card debt.

What is the Debt Avalanche Method?

Debt avalanche pays off debts with the highest interest first, then working your way down. The longer you make payments, the less you’ll pay in interest, meaning more of your money will go toward paying down your loan principal.

You will still make the minimum payments on your other debts. The idea is that by paying your debts with the highest interest rates first, you’ll lower the amount you owe over time.

How It Works and How to Use It

Here’s what you need to do to get started:

1. Figure out where your money is going

Spend a month assessing your monthly spending habits. Record what you spend on housing, food, car expenses and gas, entertainment, utilities, phones, etc. Then total up your monthly minimum debt payments. Add all of those together and subtract it from your monthly income. Set aside a small amount of. money each month for an emergency fund. Then earmark any extra money to put toward your debt payments. 

If there is no extra money, look for ways to reduce your monthly expenses.

2. List all outstanding debts

Consider ALL of the debts you have. This includes

• Credit card balances
• Student loans
• Auto loans
• Personal loans
• Medical debt

Chart the following information:

• The amount you owe
• Minimum monthly payments
• Your interest rate
• The due date

3. Rank the Debts Starting with the One with the Highest Interest Rate

Start with the debt with the highest interest rate, then the second high-interest-rate debt and so on. The debt with the lowest interest rate should be at the bottom of your list.

Make the minimum payment on every debt except the one with the highest interest rate. Then put every extra dollar you have toward paying off that particular debt. That means if you get a bonus, tax refund, unexpected windfall, etc., all of that money would go toward your highest-interest debt until that debt is paid off.

Then you’ll move on to the debt with the second highest interest rate. You’ll work your way down the list until eventually, you’re debt-free.

Pro tip: If you have spare time, a side hustle can be a good way to earn a little bit of extra cash to put toward your debts and speed up your progress. You can make a quick $100 by delivering food for a couple of hours during a peak delivery time, or you can make between $75 to $100 simply for donating plasma.

4. Keep Repeating the Process Until You’re Debt-Free

As the first debt is paid off, you’ll have some extra money to put toward the debt with the second-highest interest rate. Update your list every month so you can watch your balance decrease (and eventually remove the debts from the list altogether) because this will help keep you motivated.

Advantages

The debt avalanche method has some advantages that make it appealing:

• You’re getting rid of your most expensive debts
• By paying off higher interest debts first, you’ll pay fewer interest charges over time
• It helps keep you organized and aware of your debt situation
• Seeing progress will give you the incentive to remain committed to becoming debt free

Disadvantages

• If your debt with the highest rate is also your biggest debt, payoff progress will be slow
• It isn’t easy to get extra money to put toward your high-interest loans
• This is a longer-term debt payoff strategy
• You may be better off contacting your creditors to ask if they’ll lower any high interest rates

Does Debt Avalanche Work?

The debt avalanche method works because you’re paying less in compounding interest over the life of your loans. 

Debt Avalanche Alternatives

Debt avalanche isn’t the best repayment plan for everyone. You have to be fully dedicated to the process because it could be quite a while before you start noticing any real progress.

Here are some other options:

Debt Snowball Method

The debt snowball method is similar to debt avalanche, except you’ll focus on paying off your smallest debt first. You won’t make payments based on interest rate. Instead, you’ll rank your debts by balance. 

Both are fairly slow debt relief options, but debt snowball gives you more quick wins as you wipe out your debts with the smallest balances and you watch your list of debts shrink.

Both snowball and avalanche can be effective ways to get out of debt — as long as you have the willpower to stick with the plan.

Check out this video to learn more about the snowball method:

Balance Transfer Credit Card

If you have good credit, a balance transfer credit card could be a faster and less expensive way to repay your debts. Many credit card issuers offer new cards with a 0% interest rate for a set period, usually ranging from 12 to 21 months. You apply for a new card, then transfer your existing debts onto that new card. Though you won’t pay any interest, you will pay a balance transfer fee ranging from 3% to 5%, but if your credit score is high enough and you’re disciplined enough to not use that balance transfer card for other expenses, it could be one of the least-expensive debt repayment methods.

READ MORE: Best balance transfer credit cards

Debt Consolidation Loan

This payoff strategy involves taking out a new loan at a lower interest rate and using the loan to pay off your other debts. This leaves you with just one monthly payment to keep track of. 

Financial institutions offer debt consolidation loans, but you can also use personal loans and home equity loans to consolidate your debts.

READ MORE: Best debt consolidation loans

Debt Settlement

Depending on the type of debt you have, debt settlement could save you the most money. You will work with a third-party debt settlement company that will negotiate with your creditors to pay off your debts for less than the full total you own. According to the American Fair Credit Council, the average debt settlement customer saves 30% of the total amount of debt they enroll in a program after the debt settlement company’s fees.

READ MORE: How debt settlement works

Debt Management Plan

Credit counseling agencies will set up what’s known as a Debt Management Plan. The credit counselor will contact your credit card companies to negotiate lower interest rates. You will make one monthly payment to your credit counselor, who will make your payments on your behalf. A DMP will cost anywhere from $25 to $75 per month.

READ MORE: Debt management vs. debt settlement

The Bottom Line

The debt avalanche method isn’t necessarily any better or worse than any other debt relief option. The best way to pay off debt is to find the strategy that works best for your financial situation. 

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