Debt Avalanche

Debt Avalanche
The “Debt Avalanche” is a debt repayment method. You make the minimum payment on all of your accounts, but you target the debt with the highest interest rate to pay off first.

What does “Debt Avalanche” mean?

The debt avalanche is a popular debt repayment strategy. It means you target your debt with the highest interest rate to pay off first. The other major debt repayment method is called the “debt snowball.” Instead of targeting the debt with the highest interest rate, it targets the debt with the smallest balance.

How does the “Debt Avalanche” method work?

In the debt avalanche method, you arrange your debts according to APR. You make the minimum payment on all of your debts, but you put a certain amount above and beyond those obligations toward your debt with the highest interest rate. The amount you decide on is up to you, but the more you can devote to payments, the sooner you’ll be out of debt.

With the debt avalanche method, you make payments until your debt with the highest APR is paid in full. At that point, you redirect your money toward the debt with the next highest interest rate. You continue this until all of your debts are paid off.

An important step in the debt avalanche method is creating a budget. Doing so will allow you to determine exactly how much you can afford to put toward your debt payments. In addition, a budget in which you separate your “want” expenses from your “need” expenses might help you identify ways to save money. By cutting unnecessary purchases, you can free up money and put it toward debt payments instead.

Debt Avalanche vs. Debt Snowball

The debt avalanche is one of two popular debt repayment strategies. The other one is called the “debt snowball.” It’s similar to the debt avalanche, but instead of paying off your debt with the highest APR, you pay off the debt with the lowest balance.

Of the two methods, which one is better largely comes down to personal preference. With the debt avalanche method, you pay off the costliest loan first. It’s considered the more efficient strategy because mathematically, removing that high-interest loan will save you more money than paying off your loan with the lowest balance.1

However, while the debt avalanche is more efficient, the debt snowball might be more effective. A high-interest loan is hard to pay off, and the debt snowball lets you start with easier ones first. You can pay them off faster, and this can give you a psychological boost to tackle the tougher ones. Of course, with the debt snowball method you’re picking low-hanging fruit—the high-interest and high-balance debts are still there waiting for you. But the debt snowball can provide just the bump in confidence you need. In fact, a recent study showed that it works better than the avalanche method, likely for those reasons.2

What is a Debt Avalanche calculator?

A debt avalanche calculator organizes your debts according to APR and selects the one with the highest rate to pay off first. Debt avalanche calculators are available from a variety of sources online. At the very least, most will tell you how long it’ll take for you to pay off your debt, and how much you’ll be charged in interest to do so.

Some debt calculators allow you to compare the snowball and avalanche methods. They determine how long it’ll take for you to pay off your loan using one method over the other. They also determine how much you’ll pay in interest. With that information, you can make an informed decision about which method you want to use.

Bottom Line

The debt avalanche is a popular method for repaying debt. You target your debt with the highest interest rate and therefore eliminate your costliest loan. While the debt avalanche is more cost-effective than the other major payment strategy—the “debt snowball”—it doesn’t give you as much of a psychological boost. Ultimately, you should choose whichever method works best for you.

References

1 Clements, Nick. “Debt Snowball Or Debt Avalanche: How To Eliminate Credit Card Debt.” Forbes, 15 June 2016, https://www.forbes.com/sites/nickclements/2016/06/15/debt-snowball-or-debt-avalanche-how-to-eliminate-credit-card-debt/#5b631dce4752. Accessed 23 March 2017.

2 New, Catherine. “‘Snowball’ Debt Method Is Fastest Way To Pay Off Your Bills, Research Shows.” Huffington Post, 16 Aug. 2012, http://www.huffingtonpost.com/2012/08/16/snowball-debt-method-fastest-way-to-pay-bills_n_1784166.html. Accessed 23 March 2017.