What Is the Debt Avalanche Strategy?

The Debt Avalanche Strategy Explained

Definition

The debt avalanche strategy involves paying off your debts starting with the loan with the highest interest rate. You'll apply that payment to the loan with the next highest interest rate after the first one is paid off.

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Definition and Example of the Debt Avalanche Strategy

The debt avalanche strategy involves prioritizing payment of loans and credit card balances based on their interest rates. You'll pay off those with the highest rates first.

You might have three credit cards. One may be charging you interest at the rate of 21%. Another may be charging 17%, and the third may be charging 14%. You'd make minimum payments on all three, but you'd throw a little more money each month at the one with the 21% rate until it's paid off. Then, you'd send that extra money to the next-highest card, the one with the 17% rate.

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. Start with the highest rate, and work down to the lowest. 

Pay your minimums. Keep making minimum payments on all your loans or credit card balances. You’ll focus on one balance at a time. But it's important to stay current on all of them to avoid fees and damage to your credit score.

Pay extra on the account with the highest rate with any additional money you have available each month. This reduces the amount you owe at that high rate.

Build momentum. Cross each loan off your list after paying it off. Redirect the amount you were paying on that loan to the one with the next highest interest rate.

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

Suppose you owe money on the loans detailed below. Based on your monthly budget, you know that you have $150 more 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

According to the debt avalanche method, that additional $150 at your disposal goes toward the credit card payment, because that loan has the highest interest rate. You pay $630 per month to your credit card issuer as a result: the $480 minimum payment plus the additional $150.

That minimum payment goes away after you pay off the credit card, 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 instead. You'll pay $669.60 ($630 plus your required $39.60) as a result. That will quickly eliminate the remaining loan balance. 

Now fold what you were paying on the personal loan into your additional payments. That will result 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.

Note

Continue the process, moving from one debt to the next, until you're debt-free.

Benefits of the Debt Avalanche Strategy

The debt avalanche is an effective strategy because it focuses on interest rates. A portion of each monthly payment goes toward interest charges on most loans. The remainder reduces your loan balance. You have to pay more to cover interest costs with higher rates, so your payment makes a smaller dent in your loan balance. You'll waste less money on interest by minimizing the overall interest you're paying, and your payments will work toward bringing your loan balances down.

Do I Need to Use the Debt Avalanche Strategy?

The debt avalanche might be a good fit for you if:

  • You want to minimize your total cost of borrowing. 
  • You believe in paying as little interest as possible.
  • You have the discipline to keep paying extra on a sizable debt for an extended period of time.
  • You don’t need positive reinforcement frequently or early in the process.
  • You're 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.

You'll pay off your debts in order of size, from the smallest to largest, with this strategy. The idea behind the debt snowball method is that having small wins early on helps to keep you motivated to stick with your debt-reduction plan, but this method could end up costing you more in total interest overall. 

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

Note

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

What to Do if You Need Help

The debt avalanche method can be a beneficial solution for some, but others may need additional guidance. You have at least two other options.

Credit Counseling

Consider asking for help if you’re struggling with your payments, and you don’t have enough money to put toward a debt avalanche. 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 (DMP), 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, but it’s a more extreme solution. You attempt to pay creditors less than what you owe them with help from a for-profit company, but there’s no guarantee that your lender will be willing to negotiate, and debt settlement programs can lead to lower credit scores. It’s ideal to try other solutions before you try debt settlement.

Key Takeaways

  • The debt avalanche strategy involves paying off what you owe by prioritizing your loans and credit card balances with the highest interest rates. 
  • The debt avalanche strategy is best for those who want to minimize interest. 
  • The debt snowball strategy pays off debt starting with the smallest balance. It offers small wins along the way. But you may pay more in interest with this method.
  • Speak with a nonprofit credit counseling agency if you can't afford your minimum monthly payments.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. KeyBank. "What Is the Debt Avalanche Strategy?"

  2. Federal Trade Commission. "Coping with Debt."

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