When you first hear the term “debt avalanche,” you may envision something that is huge, crushing and out of control. If that’s how you feel about your current debt, this kind of avalanche may actually be the way for you to break out of debt.
Experts in consumer finance don’t always agree on the best method for debt repayment, however their opinions generally fall into one of two schools of thought—pay off the smallest debt first (debt snowball method) or pay off the debt with the highest interest rate first (debt avalanche method). The one that works best for you will depend on whether you want to see progress sooner or whether you are patient about waiting longer for results. Debt calculators like the one available at MagnifyMoney.com generally show that using the debt avalanche method will save you money in finance charges and get your debt paid off sooner.1
How the Debt Avalanche Works
Begin by listing all your debts, including credit cards, medical bills, auto, student and personal loans (exclude your mortgage from this list), with the highest interest rate at the top. This will be the first debt that you’ll pay off. If it is also the debt that has the highest payoff amount, you may be in for a longer wait before you are rewarded with a paid-off account.
| APR | Balance | Mo.Min Payment | |
| Credit card 1 |
21.0% |
$5,400 | $148 |
| Credit card 2 | 19.0% | $7,500 | $193 |
| Auto loan | 9.8% | $19,500 | $412 |
| Student loan | 4.0% | $4,300 | $49 |
| Total | $802 |
For the purpose of this demonstration, let’s assume you have a total of $1,000 per month to allocate to debt repayment. Using the example above, this leaves $198 after all the minimum payments are made. Add that $198 to the $148 minimum payment on Credit card 1 for a total of $346 each month toward that bill. Within a year, your highest-interest bill will be more than cut in half, as long as you don’t make any additional purchases on that card.
The patience we mentioned earlier will come into play now because you’ll need to stay the course, making payments on time every month without adding more debt. When Credit card 1 is paid off, add $346 to the $193 you’ve been paying each month on Credit card 2. At $539 per month, that debt will be gone in a little over a year, and you will begin to see the avalanche effect as your other bills are swept away over time.
One exception—pay the IRS first
The one entity that takes priority over your debt avalanche is the Internal Revenue Service (IRS), which is not in the lending business. If you owe them money, you need to make that your first payment priority, or they may begin taking money out of your paycheck.
The average American household carries $16,061 of credit card debt and pays a total of $1,292 in credit card interest per year.2 The debt avalanche method has helped many consumers find their way back to the surface and out of the red.
- http://www.forbes.com/sites/nickclements/2016/06/15/debt-snowball-or-debt-avalanche-how-to-eliminate-credit-card-debt/#235836d487d3
- https://www.nerdwallet.com/blog/average-credit-card-debt-household/