Debt avalanche method: pros and cons

How does the debt avalanche work?

The debt avalanche method involves paying off your highest-interest debt first while making minimum payments on the rest. Once your highest-interest debt is paid off, you’ll move on to your debt with the second-highest interest rate and continue this pattern until you’re debt-free.

“The debt avalanche method prioritizes interest rates to pay off debt with the highest interest rate first,” said Christopher Stroup, a certified financial planner with Abacus Wealth Partners. “Once the first is paid off, you move on to the next highest-interest-rate debt.”

Paying off your debt in order of highest to lowest interest rate provides two big advantages: It reduces your total interest paid across all debts and, in some cases, may even get you out of debt faster. This makes the avalanche far more practical and efficient than the debt snowball method, which prioritizes paying off the smallest balances first.

Here are the steps for setting up the debt avalanche method:

1. Make a list of all of your non-mortgage debts. This could include debt from credit cards, student loans, auto loans, personal loans and more.
2. Sort your list in order of highest to lowest interest rates. This will become the order in which you start paying off your debts.
3. Maximize your payments toward the highest-interest debt. Devote as much money as you can each month toward paying off your highest-interest debt. Perhaps you can set a budget to cut back on nonessentials or start a side gig to bring in an extra $250 per week.
4. Make minimum payments on the rest. To protect your credit score, make sure you’re still making minimum payments on the rest of your debts.
5. Once the first debt is paid off, move on to the next. After your debt with the highest interest rate is fully repaid, start maximizing your payments toward the second-highest-interest debt. Continue this pattern until you’re debt-free.

» MORE: How to negotiate credit card debt

Debt avalanche example

Let’s say you have five debts to pay off. Step one is to list them out, and it helps to include the loan balance as well.

Step two is to rearrange those debts in order of their interest rates (or annual percentage rates), going from highest to lowest.

Next, start making maximum payments toward the Amex card while making minimum payments on the other four. Since different lenders may have different due dates throughout the month, setting your minimum payments on autopay is a good idea so you don’t miss a payment and damage your credit.

Let’s assume, for the sake of simplicity, that you have $1,000 total to apply toward your debts each month and that the minimum payment on each balance is $100.

In steps three and four, you would set up your monthly payment schedule like this:

• Amex card: $600
• Visa card: $100
• Personal loan: $100
• Auto loan: $100
• Student loan: $100

By following the debt avalanche method, you’ll pay off your Amex bill within four months, your Visa bill within another three months and your personal loan within another two months. By the end of the year, you should be down to just the two debts with the lowest interest rates.

» MORE: Interest rates and how they work

Advantages of the debt avalanche

The debt avalanche method is widely considered to be one of the fastest and most practical ways to become debt-free. As such, its primary advantages are related to speed and efficiency.

• It reduces your total interest paid. By paying off your highest-interest debts first, you’ll shrink the amount of interest you’ll pay in total.
• It can reduce the amount of time you’ll be in debt. In some circumstances, reducing your total interest paid will also accelerate your path to becoming debt-free.
• It may be better for your credit in the short term. Since fully paying off a debt can reduce your credit score slightly in some cases, the debt avalanche — which can take longer to pay off individual loans than the debt snowball — might actually be better for your credit score in the short term.

Disadvantages of the debt avalanche

The chief disadvantage of the debt avalanche method is that it requires discipline. You won’t necessarily be paying off individual debts very quickly, and, for some borrowers, the lack of tangible progress can feel demotivating.

• It may take longer to pay off individual debts. If your highest-interest debt also has a high balance, it may take months or years before you fully pay it off.
• It requires patience. The debt avalanche method doesn’t necessarily provide the same quick wins that the debt snowball method does, and therefore it may require extra fortitude.
• Your DTI stays higher for longer. Your debt-to-income (DTI) ratio is your minimum monthly debt payments compared to your gross monthly income. Since using the debt avalanche may mean keeping your installment loans open for longer, your DTI may remain high for a prolonged period. A high DTI makes it harder to get an additional loan, such as a mortgage, while you’re paying off debt.

» MORE: How your debt-to-income ratio can affect your mortgage

Alternative debt reduction strategies

Here are some other strategies you can employ to become debt-free:

• Debt snowball: The debt snowball involves paying off your lowest-balance debt first without regard to its interest rate. While not the most efficient way to pay off debt, some find the debt snowball’s “quick win” approach to be more motivating than the slower-paced, more methodical debt avalanche.
• Balance transfers: Balance transfer credit cards allow you to move high-interest debt onto a 0% interest card for a small fee (usually 3% of the transferred balance). However, in addition to the fee, balance transfer cards also require good or excellent credit for approval.
• Debt consolidation loans: Debt consolidation loans are personal loans specifically designed to help you pay off debt. Their monthly payments, interest rates and repayment schedules are all fixed, which makes planning and budgeting easy.
• Debt management plan: Debt management plans (DMPs) are commonly offered by credit counseling agencies and designed to help you fully repay your unsecured debt during a period of up to 10 years. With a DMP, your credit counselor will often negotiate lower interest rates and reduced fees with your creditors.

Keep in mind that these debt strategies aren’t mutually exclusive. For example, while using the debt avalanche example above, you could potentially save hundreds of dollars more on interest and become debt-free faster if you move your combined $3,600 in credit card balances onto a balance transfer card. That would allow you to simply focus on paying off your student loan, auto loan and personal loan during the window of 0% interest.

You might also consider combining both the avalanche and snowball strategies. Start with the debt avalanche and stick with it for as long as you can. If you begin to feel disheartened by the seeming lack of progress, adopt the debt snowball for a few months to pay off one small debt. Once you’re done celebrating this milestone, switch back to paying off your highest-interest debt.

» MORE: How to get out of debt

Bottom line

The debt avalanche method prioritizes paying off your highest-interest debt first while making minimum payments on the rest. This practical and mathematically supported approach can save you time and money, but it requires discipline since you may not pay off individual debts as quickly as you’d like.