Liz Alterman
26 days ago

Using the Avalanche Method as a Strategy for Paying Off Debt

I know what you’re thinking: If I’m already buried under a mountain of debt, the last thing I want is an avalanche metaphor. 

But ironic naming aside, this debt-elimination technique is your ace in the hole if you’ve got tons of high-interest debt and not clue how to start whittling away at it. Here’s the 101. 

Why the avalanche metaphor?

Picture a snow-covered mountain peak crumbling down the mountainside, starting as a ferocious behemoth and ending as a light dusting by the time it hits the ground. The avalanche method of attacking your debt follows the same trajectory.

In money terms, this means putting the majority of your payments toward debt with the highest interest rates first, while only making minimum payments on all other outstanding balances. 

The rationale behind this strategy is that you’ll eliminate the debt that’s costing you the most in interest. That’s important, because when it comes to debt, interest is your mortal enemy. 

It is seriously devastating to make minimum payments on a giant balance, only to watch it mushroom month after month because you’re just paying interest and not actually reducing the principal (a.k.a. the amount you actually borrowed). 

According to the avalanche method, once you’ve paid off the debt with the highest interest rate, you move on to the one with the next largest interest rate, keeping the rest at minimum payments (then rinse, repeat until all your debts are repaid).

Okay…so how do I start?

Make a list of your outstanding debts in order from highest to lowest interest rates, then consider the dollar figures on the debt. 

Example time!

Let’s say you have three different debts:
  1. Student loans with a balance of $22,000 at 3.6 percent interest 
  2. An auto loan with a balance of $4,000 at 4.2 percent interest
  3. $7,000 in credit card debt at 14.4 percent interest

You’ve got $750 per month available for repaying all of these. But how much should you put toward each?

According to Mr. Debt Avalanche, the answer is C. Why? Because that 14.4 percent interest is going to end up costing you the most month to month. (Some quick math makes this obvious: 14.4 percent of $7,000 is more than $1,000 per month in interest! YIKES.)

So, if each debt has a hypothetical minimum monthly payment of $75, you’ll put $75 toward your auto loan and your student debt (that’s $150 if you’re keeping track) and devote the remaining $600 toward your credit card debt. 

Do this every month until your credit card is paid off. (And don’t rack up more debt while you’re doing it! Step away from the flash sale.)

But I just want to get rid of the big balances!

I know, the higher numbers are scary, but throwing the bulk of your money at the loan with the biggest price tag doesn’t mean you’re getting rid of your debt as quickly (or as cleverly) as possible.

Focus on where you’re losing the most money in interest. The debt avalanche method minimizes both the total amount of money you’ll spend in interest as well as the amount of time it takes to pull yourself out of debt because you’re stopping interest from building on itself (that’s “compounding” in financese) at the highest rate. 

Pro-tip: try to lower your rates.

Just because you got stuck with high interest rates when you took out that loan or opened that credit card doesn’t mean you’re stuck with them forever. 

At literally any time, you can attempt to have your interest rates lowered. You’d be surprised what can happen if you pick up the phone and call your credit card company (especially if you’ve had the card for a while—creditors loooove loyalty). 

Talking to a customer service rep might be your own personal form of torture, but if you come out of with a few percentage points knocked off your monthly bill, it’s worth the cringey few minutes.